The Gift of a Down Payment: The best holiday gift of all?

Even a 3 1/2% FHA down payment is not the easiest thing for everyone to obtain, and with the dream of homeownership so close to coming true, it feels like it is one of the biggest hurdles to overcome. Maybe this year, in the spirit of giving, your dream of homeownership can be something to unwrap. Did you know that some people choose for their holiday cash gifts to go toward their down payment? Before you accept the gift of a down payment, it’s essential to understand the guidelines you’ll need to follow.

Who Can a Gift Money Toward a Down Payment?

Generally, most lenders won’t allow just anyone to give you a cash gift to purchase a home. In order to receive a gift to do so, it must come from a family member (such as a parent, sibling, or grandparent). It’s also commonly acceptable to receive cash gifts from a spouse, domestic partner, or significant other if engaged to be married.

Are You Eligible for a Down Payment Gift?

Not all loan types are created equal in terms of Down Payment Gifts. Remember to consult a reputable mortgage advisor, like one from Stanford Mortgage, to ensure your loan can accommodate gift giving, and determine how much can be gifted.

If you’re taking out a conventional loan backed by Freddie Mac or Fannie Mae, all of your down payment can be gifted, as long as your down payment is equal to 20% or more. If you are putting down less than 20%, only part of the down payment can be gifted, as some of the money would need to come out of your own pocket. The actual ratios will vary depending on your actual loan type.

If you’re planning on choosing an FHA or VA loan, and your credit score is above the minimum threshold of 620, the entire down payment can be gifted. If your credit score happens to be lower, you would need to be responsible for at least 3.5% of the down payment.

Remember, regardless of the loan you choose, a down payment gift is only acceptable if the house you will be purchasing will be your primary residence or second home.

Providing Proof of the Down Payment Gift

If you happen to meet the above circumstances, then you are off to a great start. Just remember that most lenders will require you to provide detailed documentation on how, from whom, and when a down payment gift is exchanged. Specifically speaking, you will most likely need to produce a letter which includes; the name of the donor, the relationship of the donor, the date the gift was sent, the amount of the gift, and a statement that includes the fact that the gift was being given with no expectation of being repaid.

You will then need the letter to be signed by the donor and yourself and possibly provide further documents such as a copy of the donor’s bank statements (to prove that they are in a position to gift the money) or a deposit slip proving when the money was put into your account.

It is always better to make sure this process is finished sooner rather than later. Even though there is no set time frame on when down payment gifts are allowed, you may not have to bend over backward providing proof of the gift if it was sitting in your bank account when lender first looked at your account when you applied.

The Donor and Tax Laws

There may be a few tax implications for the donor of the gift as well. The IRS enforces a gift tax on specific monetary gifts and this tax is paid solely by the donor, rather than the recipient. For example, in 2015, a donor could gift up to $14,000 to any one person without being responsible for a gift tax. If the donor were married and filed a joint return at the time, the donor and their spouse would jointly be able to gift up to $28,000 to a family member without worrying about the gift tax as well. Keep in mind, there are no constraints on how many people you can gift to each year.

Sometimes both parties can mutually agree to have the gift recipient pay the gift tax. If this is a possibility for you, it would be beneficial to understand the numbers first to see how it may impact you when tax time comes.

If you are currently entertaining the idea of purchasing or selling, I would be more than happy to walk you through what’s currently on the market, or what your options may be. Please feel free to give me a call, or email me!

 

 

Information provided by smartasset.com