Here’s all you need to know about using gift funds for a down payment.
Down payment gifts make it much easier to purchase a home, and mortgage lenders are generally happy to accept them. Lenders allow cash gifts for a huge array of loan programs, including FHA, VA, USDA, conventional, and even jumbo loans.
However, if you’re getting a cash gift for a down payment, be sure to document the gift properly. Should you receive your gift improperly, your lender will likely reject your home loan application.
Here’s how to properly document a cash down payment gift:
1. The gift must be documented with a formal gift letter. The letter needs to have specific information on it, including the dollar amount of the gift, the date the gift funds were transferred, the address of the property being purchased, the donor’s relationship to the homebuyer, the source of the funds, and a note that the gift is an actual gift, not a loan. The giver cannot require repayment of the given money in any way.
2. A paper trail must be shown for the gift monies as they move from the giver’s account to the buyer’s account. You need to provide bank statements from the accounts that the funds are coming from. You’ll also want to make sure that the exact amount noted on the letter is what is transferred.
3. You must provide confirmation that the money landed in the buyer’s bank account or was wired directly to escrow. Include a deposit receipt or a bank statement to confirm the transfer.
So who can gift money for mortgage down payments? Generally speaking, family members can give funds, including parents, grandparents, siblings, children, fiances, or domestic partners. Those related by marriage, adoption, or legal guardianship can also gift a down payment. If using an FHA, VA, or USDA loan, the gift can come from a close friend, employer, charitable organization, government agency, labor union, or someone else with a non-familial relationship. One important note: Mortgage down payment gifts cannot come from anyone with a financial interest in the transaction.
How much money can be gifted? All loan types allow all of the down payment funds to be gift funds. Conventional loans backed by Fannie Mae require a 5% minimum contribution if you’re purchasing a primary home that has two to four units.
Is the gift taxable? You’ll need to consult with your tax advisor, but generally speaking, the one receiving the gifts does not have to pay taxes on the money received. Hopefully you found this overview helpful! When you’re ready to buy or sell homes here in San Diego, please reach out to me via email, call, or text. I’d love to have a conversation with you.