Setting a budget and saving money for a down payment can be a challenge, but a gift from a willing (and generous) family member can certainly help reduce the financial strain. However, before you head to the bank to make the deposit, there are some rules and requirements that you should know about accepting gift funds.
The gift must come from a family member
So, you’ve already identified someone who is willing to lend a hand. Great! Just make sure they’re a close relative. What’s defined as close? Lenders typically require gifts to come from a spouse or domestic partner, or a blood relative such as a parent, grandparent or sibling. Exceptions might include gifts from a charitable organization, a homeownership assistance program or your employer.
There could be tax implications for the gifter
Before your relative opens their wallet, it’s important that they understand the potential tax implications for gifting funds. Starting in 2018, gifts of $15,000 or less are not subject to the federal gift tax. And that limit is per person, which means if your parents are married and file a joint return, they can gift up to $30,000 without incurring any tax. For more personalized advice on this matter, we recommend consulting with a tax professional.
You can use gift funds for your entire down payment
If you’re applying for an FHA or VA loan, you can use the gift to cover your entire down payment. However, keep in mind, there are other types of loans that may require you to contribute at least 5% of your own funds. Additionally, gifts can only be used on a property that you intend to occupy as your primary residence or as a vacation home.
Make sure you have a paper trail
Lenders want to ensure that the gift you’re receiving is not a loan and won’t result in new debt. One way to document that is with a detailed gift letter. You can write one yourself or obtain a template from your lender. Be sure to include the following:
- Your name, the donor’s name, their address, and their relationship to you
- The gift amount
- Date funds were transferred
- Statement from the donor that no repayment is expected
- Address of the property you’re purchasing
- Both you and the donor’s signature
The lender will also want to see evidence of receipt of funds, which can be deposited into your bank or wired directly to the title/escrow company. If you’re getting an FHA loan, in addition to the gift letter and documentation of transfer, the donor will be required to submit a copy of their personal bank statement to show the funds leaving their account.
Seasoning funds upfront can help
If you haven’t found the perfect house yet but know you’ll receive a gift for your down payment eventually, depositing the funds into your bank now can save you from documenting it later. When you go into contract on a home, the lender will request at least two months of your personal bank statements. If the gift has been in your account for that time period, the funds would then be considered ‘seasoned’ and therefore no documentation would be necessary.
Gifts are definitely a nice way for family to help fund the purchase of your dream home and are well worth what you’ll get in return. If you still have questions about using gift money toward your down payment contact one of our trusted loan advisors today.