Gift Funds Used for Down Payment: Guidelines to Follow

One of the most difficult challenges that homebuyers face when purchasing a home is making a down payment. Fortunately, if you are short on cash or have money set aside for other high-priority obligations, many lenders will allow you to pay for the home purchase with gift money.

Therefore, if you have someone to contribute towards your down payment it will help you get over the financial hump and into the home of your dreams. However, before accepting a down payment gift be sure you are aware of the rules you will need to follow.

The rules as to who can fund your down payment vary depending on the lender and mortgage program you are applying for. Particular programs like conventional programs only accept down payment presents from family members or close relatives, such as parents, aunts and uncles, grandparents, or your husband or fiancé.

However, if you are applying for an FHA mortgage, your down payment gift can come from your job, a labor union, a government agency, a charitable organization, or even a non-blood relative.

A Government agency can also fund your down payment as part of a program that is aimed at bringing first-time home buyers into the market.

Consult your lender for a list of acceptable donors.

The amount of gift money you are eligible for is determined by the type of mortgage you’re taking out. If you are taking out a conventional mortgage guaranteed by Fannie Mae or Freddie Mac, the entire 20% down payment requirement can be gifted but if you are putting down less than that, some of the cash can be a gift, and the rest will have to be paid out of pocket.

If you are getting a VA or FHA loan and your credit score is below 620, lenders require that you put down at least 3.5% of the down payment from your pocket. But, if your credit score is higher than 620, then the entire down payment can come as a gift.

There are also limitations depending on the type of property you are purchasing. Gifts are accepted for primary houses and second properties on conventional loans. However, they are not permissible for the purchase of an investment property in any situation.

A second property has various restrictions, including the fact that gifts are not authorized with USDA, VA, or FHA loans.

Always check with your mortgage provider to see if gift money is permitted with the loan program you select.

It is important to provide detailed documentation of the down payment funds that have been transferred from the contributor’s account to yours. This should be in the form of a letter that includes:

The letter must be signed by you and the contributor. The lender may also ask for further documentation to back it up like:

When using a down payment gift fund both you and your donor need to keep a paper trail. This is important because the lender will want to ensure that the donor is not facing any financial hardship by donating the funds to the borrower.

You often do not have to worry about writing a gift letter documentation if your gift money is seasoned. Seasoned means that the gift funds have been in your account for at least two months before the buying process.

You will not owe any taxes as a recipient of a down payment gift irrespective of the gift amount. However, the gift giver may be liable to pay gift tax if the amount exceeds the annual tax exclusion limit. For instance, in 2021individuals can give up to $15,000 without incurring a tax penalty. Married couples filing jointly can gift up to $30,000 without having to report it to the IRS.

If you want to avoid family conflicts, make sure the gift giver understands the tax ramifications of the gifted cash. You can also always negotiate with the donor to pay the tax portion yourself.

Accepting gift money can assist buyers, especially first-time homebuyers to afford the costs of a property. If you know the rules and follow them, you can save money on your house purchase by taking advantage of the options available to you.