How To Use Gift Money for a Down Payment
What’s the next step during your home search after you get additional funds for your down payment from your family. Get educated on what you need to know with regards to gift money.
Personal Loans vs. Gift Money
While you may be quite thrilled that your bank account suddenly has a larger down payment and you feel very confident about buying a home, the source of where these funds came from needs to be provided to the lender to see if they’re allowed to be used.
The reason why lender’s examine these funds closely is because many people are actually getting a loan from a family member or friend, and then have to repay them. So, it is not really a gift. The problem your lender has with this is it becomes a new monthly payment negatively affecting your debt to income ratios.
If it is a loan what are the repayment terms? Are you be able to manage the cost together with a new mortgage payment? If it is not a loan, you’ll be required to prove where these funds originated, who sent them, and that they are in fact a gift.
The Gift Money Letter
The best method to prove where the gift money came from is to have the giftor write or type a gift letter to you. This is an easy process that should work without any wrinkles if your donor truly doesn’t expect the money to be repaid by you.
The giftor or donor just needs to state the details, such as their name, address, phone number, the specific gift amount, and the date it was deposited into your account and how they are related to you.
Towards the end of the letter, the donor should include a brief statement claiming the funds are a gift and that no repayment is required. Finally, sign the letter and have it notarized if time permits.
Who is Allowed to Gift Me Money for My Down Payment?
For conventional & conforming loan amounts, your gift money must only come from a family member, which may be al listed here (including relatives who are grandparents, great-grand parents, related by one parent, foster, and adopted ):
A parent
An aunt/uncle, niece/nephew, or cousin
A brother or sister
A child
A spouse, fiancé, or domestic partner
An in-law or soon to be in-law
In contrast, FHA loans differ and will not allow gift funds from cousin, nieces, or nephews, yet will permit gifts from close friends who established an evident and positive interest in your life. This may include ex-spouses and their in-laws. Additionally, FHA loans will allow gift money from an employer, labor union, government agency or public entity that specializes in homeownership assistance.
USDA and VA Loans permits anyone to give you gift funds for the down payment on the grounds they are not a party with an interest who stands to earn a profit, such as the seller, builder, lender, real estate agent, or developer.
How Much Gift Money Can I Use for My Down Payment?
A donor has no restriction on much they can gift you for the down payment or closing costs. Although, certain loans and property types do require proof you can come up with 5% of your own funds without help from a donor.
Generally speaking, if your down payment is for a primary residence or second home, and when the total down payment is 20% or higher, you have no restrictions how to use the gift money. If the down payment is below 20%, you may be required to demonstrate you can contribute 5% of the down payment from your own funds.
Multi-family homes could have a variety of guidelines. In a worst case scenario, they’d demand you to come up with a chunk from your own savings if one unit is your residence. If the property’s use is as an investment property you will not be able to apply any gift money towards the down payment or closing costs.
Gift Money and Taxes
Generally, any gift amount less than $15,000 will not have a tax. Additional paperwork is required if you’re given money more than $15,000. The donor will have to file this gift amount so it is recorded into their lifetime gift-giving limit, which is up to $11 million to avoid any taxes.
Still looking for gift money and down payment answers about the loan product you’re applying for? Ask a licensed loan originator at 1st Nationwide Mortgage. Their goal is like yours which is to get the best home loan for your situation, including low rates and low fees.
Scott is a Business Development Manager at 1stNWM. He blogs about home loans, personal finance and lives in Orange County, CA. He feels good about sharing his expertise and real world stories of successful real estate transactions. when he’s not at work, he is with his bestie, a four-legged furry and often sloberring Saint Bernard, Wyatt.