Gifting Money for a Home Purchase – How Does it Work?
“No one has ever become poor by giving.”Anne Frank
As we come to the end of the year, it’s time for the holidays, and that usually involves giving. If you’re one of the lucky ones, you may get the gift of a lifetime – a down payment on a home.
Now when it comes to reporting this down payment to your lender, they do not care if you’ve been naughty or nice.
What they do care about is this – that this down payment is really a gift and is not a temporary loan that needs to be repaid.
Starting with the Who and the Why
It may sound a little scrooge-like, but mortgage lenders tend to frown upon gift money for a down payment for a conventional loan, if it didn’t come from someone close to you.
“Close to you” typically means parents (natural or adopted), blood relatives, fiancés, or domestic partners.
It generally cannot be someone with an interest in the property, like a builder or be any party to the transaction. Although some programs will also allow gifts from a charitable organization or a non-blood relative.
You’ll want to speak with your lender for more specific information on acceptable donors for your loan type.
Get Everything In Writing
When using gift funds, you must provide a gift letter that proves the funds are not a loan to be repaid.
You might even be asked to provide documentation to prove the transfer of the gift into your bank account such as a copy of the check or bank account statement. So it’s a good idea for your kind donor to use that memo area on the check to state it’s a down payment gift!
Did we really just talk about writing a check? Yes, we know it’s gone the way of the payphone – but it’s good documentation.
The next thing your lender will require is a gift letter.
The gift letter is a one-page form the donor fills out which your lender will provide. The gift letter typically includes:
- The donor’s name address phone number
- Gift amount
- Property address
- The source of the gift meaning what account is coming from date of the transfer
- The signature of both the donor and the borrower
All this need for documentation can seem a bit intrusive. In fact, your donors may not like the idea showing their bank statements to your lender. Who knows, lenders may even start asking questions about other withdrawals and deposits on their statements and asking for more documentation.
The smart thing is to have your donor wire the money directly to escrow. Again this can be arranged with the lender.
Why In the World Do Lenders Care Where the Down Payment Comes From?
Simple answer. Federal regulations require lenders to consider the buyers’ debt-to-income ratio to make sure borrowers can repay their mortgage.
Secondly, there are money laundering laws that require banks know sources of large deposits. And finally the Internal Revenue Service (IRS) also wants to make sure that the donors making the gifts are conforming to gift tax laws.
Interesting fact: Twenty-eight percent of buyers were able to use a gift from friends or relatives. The share receiving family help has remained relatively steady since 2003, though it did rise to a high of 36% in 2010.
FHA Loan Gifting Guidelines
An outright gift of the cash investment is acceptable if the donor is
- The borrower’s relative
- The borrower’s employer or labor union
- A close friend with a clearly defined and documented interest in the borrower
- A charitable organization
- A governmental agency or public entity that has a program providing home ownership assistance to low- and moderate-income families, or first-time homebuyers
This Includes USDA and VA Loans
The USDA and VA place very few restrictions on who can give you a gift. The only stipulation is that it can’t be an interested party. An interested party is involved in the transaction directly or indirectly, including:
We’ve only covered the basics. For personalized information on gifting as a down payment for conventional, VA, FHA or USDA loans call an Embrace Home Loan® professional today. We’re ready to work with you right now.