For home buyers struggling to come up with the money for a down payment, loving family members are often considerate enough to give them gifts to help. Gifts can help buyers come up with the big chunk of money they need to buy a home, but there are tax implications involved. Before you accept a gift to help with your down payment, make sure you understand what doing so implies.*
Who Can Give a Gift?
In the mortgage world, a gift can come from one of two places. Sometimes a caring friend or family member can step in and give a gift to help a buyer out. Sometimes it can come from a government program designed for first-time buyers. Either source is considered a gift, and your Lender will want a few more details about it.
A Relationship Must Back Gifts from People
If you are getting a gift from a friend or family member, your Lender will want to see a letter from that person that shows their relationship with you and that the money is a gift, not a loan. Both you and the gift’s giver will sign the letter. The Lender may want to see that the gift giver has the funds to give the buyer what was promised, and they may delay the closing to ensure that the money legitimately clears the giver’s bank.
Gifts Cannot Be Loans
Sometimes family members want to help a first-time buyer through a loan. While this is fine, it cannot be counted as a gift. If the money is a loan, then the Lender must count it as part of the debt-to-income ratio, so you need to disclose this fact. Failure to reveal the real source of the money, loan versus gift, can make you guilty of mortgage fraud.
Gift Limits and Gift Taxes
There are limits on how much money someone can give as a gift for a home’s down payment. If the gift comes from the buyer’s parents, they can give up to $30,000 as of 2020 without incurring any tax penalty. Other friends or family members can give up to $15,000. Gifts above these limits are going to incur a gift tax. The gift tax is the family member’s responsibility, so you’ll want to avoid scenarios that would land them with this expense.
The Issue of Seasoned Money
Another factor that may weigh into gift money used for your down payment is whether the money is seasoned. Seasoned means that the money has been in your account for a while. If money is seasoned, the Lender is less worried about where it came. If you know that you have family members who want to give you a gift to help with your down payment, try to have it in your bank account, and hold it there for at least two months before you start the home buying process.
Keep a Paper Trail
If you’re using gifts to help with your down payment, both you and the gift giver need to keep a paper trail. You need to be able to show your Lender where the money came from if asked. The more documentation you have, the better you will be should you need it.
The bottom line is this: down payment gifts can help buyers, especially first-time buyers, afford the costs of a home. Gifts are perfectly viable options for getting the money for your down payment, as long as you follow the rules. Keep proper documentation, be honest with your Lender, but use the tools available to you to make your home purchase a bit more affordable.
*Consult with your accountant regarding mortgage gifts.