While you might only think about gifts around the holidays, mortgage lenders have gift giving on their minds all year long. This is because many loan programs allow some or all the down payment for a new house to come as a gift from a family member.
How does a gift like this work?
An FHA loan, which is available to everyone, not just first-time homebuyers, has a down payment requirement of only 3.5% of the purchase price. This can all be received as a gift. Conventional lenders will also allow some or all the down payment to be a gift from a family member.
The gift letter
There are several rules to follow if a homebuyer is going to get down payment money as a gift. There needs to be a letter from the giver of the gift and it must cover specific information, including:
- The giver’s personal information and relationship to the recipient
- The address of the house being purchased
- The exact amount of the gift and dates the money was transferred
- A note that the giver does not expect repayment in any form
- The giver’s signature
Keep a paper trail
The gift letter itself may not be enough to ensure a loan. There also needs to be a well-documented paper trail that shows the money in the giver’s account and how it gets transferred to the homebuyer’s account.
A buyer will want to get a list of exact requirements from his or her lender and then follow the procedures carefully.
What about taxes?
Another factor to consider in giving or receiving a gift for the down payment on a house is potential tax consequences. In many cases, there will be no tax impact at all for either party.
However, we are talking about the IRS here and so the rules can get a little convoluted. That’s why it’s always a good idea to check with a trusted accountant to make sure you proceed properly and don’t create an unintentional tax liability.
Having sufficient money for the down payment is often the biggest obstacle to home ownership. Receiving a gift from a family member is just one way of getting over this hurdle. It can often be combined with other strategies to accumulate sufficient funds.
Don’t let a lack of cash be an obstacle for you. Contact a lender and explore all the possibilities. If you’re not sure where to start, talk to your Realtor and get a recommendation.