What You Need to Know If Your Down Payment Includes a Cash Gift
By Doug Goelz, Mortgage Services
A gift of cash from family is a wonderful way for buyers to secure the down payment on a new home. Lenders allow gifts, but gifts must be handled in very specific ways. Here are typical lender requirements for gifts:
- Gifts must come from family, finances, or domestic partners. Gifts from friends or employers are not allowed.
- The giver has to sign a form gift letter stating the amount of the gift, the purpose of the gift (i.e., to buy the home), that the gift does not have to be repaid, and the general source of the gift (e.g., a checking account). The letter is used only for the purpose of obtaining the loan and is seen only by the lender (and possibly subsequent buyers of the loan).
- The gift needs to be to the person on the loan! In cases where husband and wife are buying a property, but only the wife is on the loan, if the money for the down payment is in an account with only the husband’s name, the husband will have to “gift” the money to the wife for the purpose of the loan. In cases where parents/grandparents are giving multiple gifts to children and grandchildren (often to keep each gift within the IRS gift limit of about $14,000 per year), gifts to minor children should be to the child AND the parent if the money is going to be used for the down payment. If the gift checks are made out solely to the children, the money cannot be used as part of the down payment (because the child is not on the loan).
- Often, but not always, 100% of the down payment can be a gift. As long as the gift is at least 20% of the purchase price and there is no subordinate financing (i.e., a 2nd mortgage), 100% of the down payment can be a gift. If the total down payment is less than 20%, or if there is secondary financing, borrowers may be required to contribute 5% of their own funds.
- The giver may have to show where the gift is coming from (for example, by showing a bank statement). Some givers may be sensitive about sharing a bank statement with the lender (and/or the person receiving the gift). Also, if the gift is in the form of a check, lenders require documentation showing the check posted to the giver’s account, and deposited into the borrower’s account. Alternatively, if the giver sends funds from his or her account directly to escrow via wire transfer, there is no need to document the source of the funds. Wiring gifts directly to escrow simplifies the documentation needed for gifts.
- Gifts may have tax consequences. Anecdotally, my understanding is that gifts will have tax consequences only if the giver has a large estate. Nevertheless, be sure to check with your tax professional for all tax-related questions and concerns.
- Finally, if you get the gift early enough, the lender may not require any gift documentation. If you receive your gift and deposit it to your account a few months before you start the loan application, and the deposit does not appear on your bank statements required by the lender (lenders usually require your most recent two bank statements), the lender does not treat the money as a gift nor require any gift documentation.
In many cases, a gifts from family makes it possible for people (especially first-time buyers) to buy a home. If you are lucky enough that a gift to assist you with you down payment is a possibility, plan ahead with the giver so that the documentation required by a lender is as simple as possible.
Questions? Feel free to get in touch with me at 415-730-4665 or firstname.lastname@example.org