Let’s face it, coming up with a down payment to purchase a home is no small feat. For many of us, this is the largest check we’ll ever have to write. So it’s only natural that buyers often need help gathering the funds to make their down payment. While lenders do permit borrowers to use gifted money for down payments, (unless the money is received at least 60 days prior to signing the Contract of Sale) there are strict regulations and several considerations to take into account.
Who is giving the gift?
Due to the requirements passed down from government entities Fannie Mae and Freddie Mac, most lenders will only allow you to use gift funds from immediate family, which is typically limited to parents, grandparents, and possibly brothers or sisters.
Whoever is giving you the gift will be required to write a letter stating that the money is truly gift that does not have to be repaid. The lender will provide a form to be signed by both you and the donor. Your donor will also have to produce bank records showing that they have access to the funds that have been promised to you.
Your donor should consider the tax implications involved in gifting you this money. Taxpayers are permitted by the IRS to gift up to $14,000 per year to as many individuals as they want without having to pay taxes on that money. So in order to give you as much as possible without exceeding that limit, parents or grandparents can write separate $14,000 checks to each recipient. So if you are purchasing a home with your spouse, one set of parents or grandparents will be able to give both of you a total of $56,000 with no tax ramifications. If the donor wishes to gift you money in excess of $14,000, he or she will be subject to the federal gift tax. However, you as the recipient will not have to report this gift to the IRS.
As with most rules, there is an exception. Parents wishing to give more than $14,000 can file the gift under form 709, which is the lifetime exemption rule. This rule permits parents to gift their children up to $5.4 million each – tax free – as an inheritance.
It is important to note that gift funds cannot be used to purchase investment properties. On primary residences, your entire down payment can be gift funds only if you are putting at least 20 percent down. Otherwise, a portion of the down payment may have to come from your own money. Similarly, VA and FHA lenders allow your entire down payment to be gift funds unless your credit score is below 619, in which case 3.5 percent must be your own money.
If you are considering putting the down payment of your new home with gift money but aren’t sure if it’s enough or need some more advice, feel free to contact Cliffco Mortgage Bankers for assistance!