It can be challenging to come up with a down payment on a new home. You may be fortunate enough to receive part or all of the down payment as a gift from parents, siblings or other loved ones. Be aware, however, that you may not be able to use that money during your homebuying process unless you follow some guidelines.
Here are the pitfalls to avoid if you’re using a gift to secure your new home.
Know What Qualifies as a Gift
If you’ve received a gift, you can’t automatically use it as as part or all of your down payment. A mortgage underwriter (whose job is to make sure you can afford the mortgage) is going to want to see a trail of the money that you have in your bank account, known as your assets. While a down payment gift is awesome, it’s not a “cash it and use it” situation. You will need to provide documentation showing who gave it to you and that it was a gift, not a loan.
Understand the Types of Down Payment Gifts
You might receive different types of gifts, depending on the giver. You can receive a gift of equity. For example, if your parents are selling a home to you, they may gift you the equity in the home. As mentioned above, you can also receive a gift of cash. In this case, you will need to show evidence of the transfer of funds and a gift letter.
Properly Manage the Timing of the Gift
The underwriting process will include an asset verification, which will look at a recent picture of your financial history and total up your assets. You’ll need to provide documentation to the mortgage underwriter that the gift was included in your assets. Otherwise, you may not be able to use it as a down payment on your home.
Secure a Gift Letter
As mentioned above, you’ll need to supply a gift letter written and signed by the person who gifted you the funds. It needs to include personal information such as the person’s name, contact information, and their relationship to you as the borrower. In addition, it should contain financial information from the institution (with the account number) where the funds came from, and the exact amount of the gift with the corresponding date they gave or will give you the funds. Finally, it needs to include a statement that the funds are indeed a gift and aren’t expected to be repaid.
Understand Who Can Give You a Down Payment Gift
Being able to accept and use a gift toward your mortgage down payment largely depends on the type of loan you’re applying for. A conventional loan requires that a gift must come from family, a domestic partner, or a fiancé. An FHA loan gives you a bit more leniency. In addition to family, it allows gifts from close friends and employers as well as labor and charitable organizations. With USDA and VA loans, the gift can be from anyone except those who have a stake in the sale, like the builder, developer, seller, and real estate agent.
Note the Restrictions on Gifts
You can receive any amount the person wants to give you as a gift. However, depending on the loan type you’ll be using, you may be required to put up some of your own money in addition to the gift as part of the down payment.
Prepare for the Tax Implications of a Down Payment Gift
In most cases, you would only be on the hook to pay taxes on the gift amount if you had told the person gifting you the money you would do so. The tax law states that a person can gift another person up to $15,000 without having to report it. If they gift you a larger amount, they need to disclose the gift on their next tax return.
Receiving a gift to put toward a down payment on a home is a wonderful thing. Just be sure you handle it correctly, so you can use it for its purpose… to buy your new home!