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You’re getting ready to buy a home, and your family surprises you with some gift money to use as a down payment. Find out what you need to know about gift money, including who can contribute, how much you can use towards your down payment, and what to do about personal loan offers and tax implications.
Gift money isn’t just a gift when it’s intended for a down payment on your home loan. Here’s why you should look that gift horse in the mouth and make sure there aren’t any Trojans that could cause you problems with your mortgage underwriting.
While you may just be happy that your down payment is suddenly in your bank account and ready for your home purchase, your loan underwriter will need to know the source of your funds.
A gift is one thing, but too many people get an offer of a loan from a family member or friend, and try to pass it off as a gift. The problem your lender will have with this scenario is that while a gift doesn’t have to be repaid, a loan eventually will impact your finances.
A loan impacts your debt to income (DTI) ratio. When it comes time to repay the loan, will you be able to handle the cost alongside your mortgage? You’ll need to be able to prove where your funds came from, who gifted them, and that they are indeed a gift and not a loan.
Additionally since the source of the down payment cannot be unsecured, a loan from a family member would have to be recorded on the title and added to your combined loan to value, which does impact the terms of the first mortgage and can impact qualification.
The best way to prove where the gift money came from is to have the gift-giver prepare a gift money letter. This is a simple process that should go smoothly if your donor really doesn’t expect you to pay the money back.
Have the gift-giver pen a short letter to your mortgage company. It doesn’t have to be a long letter. It just needs to have the facts, including the donor’s name, address, and phone number, as well as their relationship to you. It should also list the exact amount of the gift, the date it was transferred to your account. You can attach the deposit slip as proof.
This list of data should be accompanied by a short statement form the donor that it is a gift and that no repayment is expected. The donor should sign the letter, and you might want to have it notarized. If you already have the address of the property you plan to purchase, this can be added as well.
Different types of loans have different rules about gift money. For conventional Fannie Mae or Freddie Mac loans, your gift has to come from a family member, which can be any of the following (typically including relationships such as step, foster, adopted, grands and greats):
FHA loans don’t specifically allow nieces, nephews or cousins to gift money, but do allow gifts from close friends who demonstrate a clear and positive interest in your life and future. This could include your extended family members, and even ex-spouses (especially if you share children.) FHA loans also allow gifts from an employer, labor union, charity, or government agency or public entity focused on homeownership assistance.
USDA and VA Loans allow anyone to gift money towards your down payment as long as they aren’t an interested party who could profit, This would include people such as a seller, builder, real estate agent, or developer.
There are no limits on how much your donor or donors can give you for a mortgage down payment or closing costs. Depending on your selected loan and property type, you might have to prove you can personally cover a certain percentage of your down payment without help.
In most cases, if your down payment is for a primary residence or second home, as long as your total down payment is 20% or more, you can use as much gift money as you wish. If the down payment is less than 20%, you may have to show you can cover 5% of it yourself from your own funds.
Multi-family homes may have different rules, but you should still be able to use gift money for a portion of your down payment if you’ll be living in one unit. You can’t use gift money for a home that is purely an investment property.
Tax liability can change by the year, so check with your financial advisor before accepting gift funds. Typically, any gift of $15,000 or less won’t incur a tax. If you’re gifted more, the donor has to file a gift tax return, but that’s just to track their lifetime gift-giving limit, which can exceed $11 million before any taxes are due.
If several people gift you money, you’ll only need to document with a letter those which exceed 50% of your monthly income. A collective gift such as one from a crowdfunding site is generally considered a gift and won’t be taxed either.
If you know in advance that you’ll be getting any financial gift money for your down payment, document it for your mortgage company and keep all records of the money entering your account.
Wondering if the loan product you’re considering will allow you to use gift money as a down payment? Ask a trusted loan officer at Sammamish Mortgage. Our goal is to ensure you get the best loan for your new home purchase possible, including using gift money as a down payment for your mortgage.
Ready to buy a first home, a second home, a vacation home, or a multi-family home? You could qualify to use gift money as all or part of your down payment. The first step to buying a home is getting preapproved, so make sure your finances are in order and you have a gift letter from your generous donor proving it’s a gift, not a loan. Then contact a loan officer or begin your mortgage application online.
Sammamish Mortgage has been in business since 1992, and has assisted many home buyers in the Pacific Northwest. If you are looking for mortgage financing in Washington State, we can help. Sammamish Mortgage offers mortgage programs in Colorado, Idaho, Oregon and Washington.
Contact us if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.
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