Don't Count On Gift Money For A Down Payment Without Knowing The Rules First

Legally, you can't pay it back.
Using money from family for a home down payment requires diligent recordkeeping.
franckreporter / Getty Images
Using money from family for a home down payment requires diligent recordkeeping.

Saving up for a down payment can be a major roadblock if you want to own a home, especially in high-cost housing markets like San Francisco, Boston, New York and Washington, D.C.

But if you’re fortunate enough to have family members willing to help you out, they could give you the money. In fact, 25 percent of first-time homebuyers used cash they received as a gift for a down payment, according to a 2017 report by the National Association of Realtors.

Before you go running to the bank with a check from Mom and Dad, however, keep in mind there are a few rules for using gift money as a home down payment.

Who’s allowed to give money toward a down payment?

When you submit an application for a mortgage, the lender will scrutinize every detail of your finances, including your credit score, income and employment history. The lender wants to be sure you can pay the loan back. So when it comes to your down payment ― and where that cash came from ― you’d better believe those funds will be put under a microscope.

The good news is that just about anyone in your family may give you the money for a down payment. “It doesn’t have to come from someone in your direct family,” said Mat Ishbia, the president and CEO of United Wholesale Mortgage. “The gift can come from a stepparent or grandparent, as well.” So if your loaded Aunt Sally wants to help you buy a house, by all means, let her.

However, most lenders are going to be less inclined to allow you to use financial gifts from friends for a down payment, unless it’s someone very close to you, like a fiancé, according to Ryan Inman, a fee-only financial planner and the owner of Physician Wealth Services. So if you’re getting married, for instance, and would rather receive a check than a food processor as a gift, keep in mind that you probably won’t be able to put that money toward a house. Save it for furnishing your new place instead.

Further, the money may not be from someone who has any financial interest in the sale of the home, such as the seller, the agent or the broker. “Underwriting may request additional documentation to make sure transaction-related parties aren’t involved in the gift,” said Yves-Marc Courtines, a certified financial planner and the owner of Boundless Advice in Manhattan Beach, California. In other words, he said, “The Realtor, developer or other interested parties can’t funnel money to a family member who then makes the gift.”

Last but definitely not least, the money you receive has to be an actual gift.

“Lenders look to make sure it’s truly a gift, not a loan or something that has to be paid back,” said Ishbia. If the money is actually a loan and you play it off as a gift, you’d be committing loan fraud — not good, especially if you’re caught.

How much of your down payment may be a gift?

If you’re taking out a conventional mortgage through Freddie Mac or Fannie Mae, the entire down payment may be a gift if you put down 20 percent or more. In this case, you also have the added benefit of not having to pay private mortgage insurance.

If you put down less than 20 percent, at least some of the money has to come from your funds. How much is allowed to come from a gift depends on the loan type.

In both cases, you may use gift money as a down payment only on a primary residence or second home; putting it toward an investment property won’t fly.

If you’re borrowing through the Federal Housing Administration or Department of Veterans Affairs, all of your down payment may come from gift money, even if you put down less than 20 percent. However, it may be used only for a primary residence.

You’ll need to keep a paper trail

Once you’re ready to accept the gift funds and apply them toward your loan, be sure you go about the process the right way. Showing up to the bank with a briefcase full of cash (which admittedly would be so badass) wouldn’t be acceptable in your lender’s eyes. You need to be able to show a paper trail for that money; how extensive that trail needs to be depends on the lender.

It all starts with a gift letter, which makes it clear to your lender that the money is truly a gift and not a loan. It’s important to stick to key details and not include any extra fluff that could make the letter unclear. Your generous donor also needs to sign the letter, though it doesn’t have to be notarized.

Here’s what your gift letter should include:

  • The full name, address and phone number of the person giving you the money
  • Your relationship to that person
  • The exact dollar amount of the gift
  • The address of the property you’re buying
  • The date the money was transferred to you
  • Account information for where the funds came from
  • A statement from the donor that repayment is not expected
  • The donor’s signature

If you don’t want to come up with your gift letter from scratch, you can find plenty of templates on the web.

In addition to the gift letter, your lender will need to see documentation of the gift exchanging hands, typically in the form of bank statements, according to Ishbia.

Not only does the lender need to verify that you got the money where you say you did, but it also has to verify that the giver is legit too. “Lenders would want to see the source of funds to ensure the person making the gift actually has the assets to give,” Inman explained. The statements you provide should show the donor’s withdrawal, your deposit and that the amounts match up.

And don’t wait until the last minute to gather everything. “Many people think they can just have the funds wired in or deposited the day of,” said Inman. “In reality, this is something that should be handled ahead of closing so the necessary paperwork and verification can take place ahead of loan approval.”

Don’t forget about taxes

Gift money for a home down payment is treated like any other financial gift by the IRS. According to Courtines, $15,000 may be given from one person to another each year without any tax repercussions. Amounts in excess of $15,000 have to be reported to the IRS and could be subject to the gift tax and could count toward the donor’s lifetime limit of $11,180,000 (as of 2018).

Keep in mind that the lender won’t report the gift to the IRS. It’s up to the donor to disclose the gift by completing an IRS Form 709, if necessary.

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