Wednesday, October 5, 2022

Who Can Gift Money For Mortgage Down Payment

Mortgage Gift Letter Template

Who can gift money for mortgage down payment?

Your lender may provide you with a gift letter template. If thats the case, you can simply pass it along to the gift giver and have them fill it out. If the lender doesnt provide you with a gift letter template, be sure to ask what the gift letter requirements are.

If you arent given a template, here is an example of what your mortgage gift letter should look like:

Down Payment Gift Tax Consequences

The person receiving the gift will not be responsible for any tax liability, but the gift giver may be liable if the amount exceeds the gift tax exclusion limit.

For a gift that exceeds that amount, the donor must file a gift tax return to disclose the gift. Mortgage gift donors should check with their tax advisor or accountant to more accurately determine how a gift that exceeds the exclusion limit will impact their finances.

Advantages Of Using Gift Money For Your Down Payment

One of the biggest advantages of receiving down payment gift money is that youll be able to put down a larger amount than you would have without it. This could mean buying a more expensive home or reducing the total amount youre financing.

Another great advantage of using gift money to help with your home purchase is that it can help you come up with a down payment more quickly which can put you one step closer to buying a home.

To learn more about how gift money works, or to discuss low down payment programs, contact a Home Lending Advisor.

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What Are The Rules For Down Payment Gifts

When it comes to home buying, 20% is the standard amount that lenders prefer for down payments. But coming up with the cash isnt always easy. Having someone give you the money reduces your burden, although it can potentially complicate things. Before you accept a down payment gift, its important to understand the guidelines youll have to follow.

Check out our down payment calculator.

How Do I Prove I Received The Gift Money

Using Gift Money For Your Down Payment

Lenders want to make sure that the down-payment money has been received by the homebuyer in order to proceed with the loan. Buyers can provide:

  • A copy of the gift givers check or withdrawal slip and the homebuyers deposit slip
  • A copy of the gift givers check to the closing agent
  • A settlement statement showing receipt of the donors monetary gift
  • Copy of certified check
  • Proof of wire transfer

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Borrowed Money Or Flex Equity

Flex equity allows you to borrow your down payment through a variety of sources including a line of credit, a credit card, or a personal loan. If your debt service ratios work meaning you can carry the payment for the borrowed money in addition to your mortgage some lenders will consider this source of funds. With this option more than any other your budget is of the utmost importance. Since youre going to be making multiple payments, you need to make sure that will work for your cash flow.

Who does this make sense for? Lets say youre a grad student and your earning power is about to start ramping up. However, you dont want to pay rent for the next few years until you save up a down payment. If you have stellar credit, strong cash flow, and a good debt service ratio this might be the right fit. Your mortgage broker can help you figure out whether its an option for your situation.

Theres a lot to know about how much of a down payment you will need for your next property purchase and where that money can come from. When you choose to work with the Auxilium Team, we do the math for you to make sure your down payment will support your mortgage application for the home you want to buy.

If that sounds like the service you want for your mortgage financing, start a conversation with us today. Fill out our contact form or give us a call at 250-590-6520 to see how we can find the best solution for your situation.

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Who Can The Giver Be

In most cases, your lender will require that the gift be from a close relative – a parent, sibling, grandparent, first cousin, etc. In some cases you may be able to use a gift from a close friend if you can show a longstanding personal relationship. This is to help ensure the money is actually a gift and not a loan in disguise.

You also can’t accept a gift from your employer, an associate or anyone else who might be giving you money as an alternative form of compensation, as the IRS would view that as an effort to evade taxes.

One thing you absolutely cannot do is accept a gift from the seller of the home. This is basically a form of kickback that lowers the true sales price of the home, so that the lender is funding more of the sales price than it was led to believe. Since banks use loan-to-value ratios to gage risk and set interest rates, this is considered a type of mortgage fraud if kept hidden from the lender and a federal crime.

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Down Payment Gift Rules

  • The amount youre eligible to receive depends on your loan program. Theres a good chance you may have to come up with your own money to help cover the cost of down payment. More on that in our expectations below.

  • You must include a formal down payment gift letter with the received funds. A gift letter must include:

  • the borrowers name,

  • the donors name and contact info ,

  • the donors relationship to the borrower, the gift amount,

  • the address of the property being purchased,

  • and a signed statement that says the borrower is not required to pay back the gift.

  • Funds must also be properly documented through financial records. More often than not, youll need to do more than provide a gift letter. Youll have to document the withdrawal or transfer of the gifted funds. So, be prepared to provide copies of your recent bank statements, your donors recent bank statements, and copies of cashiers checks. Lenders want to be sure your received monies are in fact gifts and not additional loans that require repayment. Likewise, they want to be sure the donor is not putting him or herself in financial hardship when donating toward the home of your dreams.

  • Learn about the financial reserves you may need to help get approved for a mortgage.

    Does A Gift Letter Need To Be Reported To The Irs

    Can I use Gift Money for my Mortgage Down Payment?

    It depends on how much youre receiving in gift funds, but its important to be aware that in some cases, your donor may be taxed so be sure to let them know beforehand.

    Generally, your donor can gift up to $15,000 without needing to report it to the IRS, as this wont incur the federal gift tax. And as of 2022, the annual gift tax has been raised to $16,000 so unless your gift exceeds that, you likely wont have to deal with the IRS.

    For higher amounts of gift money, your donor will need to disclose the amount by filing a gift tax return which will then be recorded and go toward their lifetime gift tax exclusion the total amount that someone is allowed to gift people. The lifetime exclusion currently sits at $11.4 million and applies both to gifts given during ones lifetime and those passed on in estate.

    For a better understanding of gift money tax laws or for help with your unique situation, its best to consult with a financial or tax professional.

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    How Do Gift Letters Affect Mortgage Underwriting

    Say youve just gotten married and received a considerable down payment gift. Although you may be excited to get that cash in the bank, you dont want these deposits to cause problems when youre trying to qualify for a mortgage. Lets go over some additional details on how gift money affects mortgage underwriting.

    It Must Be Proven To Have Come From The Giftersown Finances

    You cant skirt the immediatefamily requirement by having your friend give your parents money that theywould give to you. The lender may ask for a history of the funds to confirmwhere they came from. This will usually be in the form of bank statementsdating back a couple months.

    While the funds must come fromthe gifters own finances, its possible for it to be borrowed funds. If yourparents have a lot of money stored in their house as equity, they can take outa home equity line of credit or second mortgage and gift the funds to you. Theyllhave to pay it back themselves they cant ask you to help repay but it wontbe a problem to gift it.

    Gifting a down payment is a greatway to give your children or siblings a head start on their home ownershipplans. If theyre trying to decide betweenbuying and renting, it can help give them the boost they need to get into ahome. Theyll also spend less in interest charges on their mortgage and reducetheir CMHC insurance premiums!


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    Cash Gifts Need To Be Documented

    For your lender, the important thing is to make sure the money is really a gift and not a loan. A loan defeats the purpose of a down payment, which is to have a portion of the home paid for up front, free and clear. If you have another loan you need to pay back on top of your home loan, it might compromise your ability to pay off the mortgage itself.

    If you’re using gift money, you’ll need to provide your lender with a gift letter – your lender can provide the form. Signed by both the donor and recipient, it states the amount of the gift, the donor’s relationship to you and that the money is a gift that will not have to be repaid. The lender may also request information on the source of the funds and the donor’s financial status, to ensure it is truly a gift.

    Equity In An Existing Property

    Can a Friend Provide Gift Funds for a Down Payment?

    If you already own a property and youve built up enough equity in it, you may be able to access that equity for your down payment. What do we mean by enough?

    If you were going to sell your existing home and use the proceeds from the sale as your new down payment, we would work with the actual amount of money you will have left after legal and real estate fees as the down payment.

    If you wanted to keep your existing home to turn it into a rental property and move into your new purchase, we would look at a refinance to unlock your equity however, that depends on having at least 21% of your propertys value in equity since the maximum loan-to-value for a refinance is 80%. Lets look at two examples:

    Example 1

    • Purchased a $500,000 condo 2 years ago with a high-ratio/insured mortgage and a down payment of $25,000 . Mortgage insurance premiums bring the loan amount up to $494,000.
    • Condo is now assessed at $600,000, plus regular mortgage payments have been made so that you have an additional $30,000 of equity.
    • The LTV is now 77.3%, so you would potentially be able to refinance back up to 80% and leverage $16,000 of the equity in your home. However, since you likely would be breaking your existing mortgage term wed have to look at what penalties you would face, as well as the additional costs associated with the refinance to ensure that it would meet your goals.

    Example 2

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    When Should You Deposit Your Gift Funds

    Its best to deposit your gift funds at least 2 months, or 60 days, prior to applying for your mortgage. Many lenders may view sudden influxes of cash, like those obtained through a gifted down payment, as red flags but time can help show your lender that the gifted money is legitimately yours and not something youll have just in the short-term.

    In contrast, seasoned money money thats been in your bank account for 2 months or longer is a green flag for most lenders, as these funds have officially been in your hands for a substantial period of time.

    Remember Its A Gift Not A Loan

    Gifted funds mean that you are not obligated to repay the person gifting you the money. Your lender doesnt want to lend money to someone who not only has to pay a mortgage but owes a separate debt to a family or friend. Its an important distinction that proves that you do not have any other debt obligations when applying for a mortgage. To qualify for a gifted down payment, the process varies slightly from lender to lender. You will want to make sure to speak to an unbiased mortgage professional when considering buying your first home. Some of the things your mortgage professional will help you prepare.

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    What If The Down Payment Gift Is Above $15000

    Down payment amounts above $15,000 and received as a gift must be reported on a gift tax return by the person making the giftnot the beneficiary. But that doesnt mean the donor will pay taxes.

    The gifts get tallied up over time and offset against the lifetime exclusion on gifts, which is currently $11.4 million, says Brookes. The purpose of filing the return is to track your lifetime gift amount, which will be used in calculating tax on your estate when you die. If you give more than $11.4 million while still alive, the gift tax rate kicks in, which can be anywhere from 18% to 40%.

    Down Payment Gift Rules: Conventional Loans

    Can gift funds be used for down payment on a Conventional or FHA loan?

    Fannie Mae and Freddie Mac guidelines allow for down payment gifts on conventional mortgage loans. Gifts can come from:

    • A spouse
    • A child or other dependents
    • A fiancĂ© or domestic partner
    • Anyone else related to you by blood, marriage, adoption, or legal guardianship

    The entire amount of your down payment can come from gifted funds if you’re buying a one- to four-unit home to use as a principal residence or a second home. The loan-to-value ratio must be 80% or less.

    You must contribute at least 5% of the down payment from your own funds if you’re buying a two- to four-unit home or a second home with an LTV greater than 80% if you’re using a Fannie Mae mortgage. Freddie Mac mortgages require at least 5% from the borrower when the loan is secured by a second home and when the LTV is greater than 80%.

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    Alternatives To Down Payment Gifts

    If down payment gift money is not available, alternatives include:

    • Saving more and using your savings to make a larger down payment.
    • Shopping for loans that require a small down payment or zero down payment.
    • Exploring down payment assistance programs, which may be available to first-time home buyers.
    • Purchase a less expensive property. A cheaper home, such as a starter home, would require a smaller down payment. You could also look into purchasing a condo or townhouse.

    Can You Repay A Mortgage Gift

    To put it bluntly, no. A gift letter is required to explicitly state that the donor will not accept any repayment in the short- or long-term, nor is it expected. Mortgage lenders need to be sure that gifted funds are just that not a loan in disguise for the borrower.

    Be sure that your gift letter reflects this rejection of repayment to ensure the legitimacy of the monetary gift.

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    Dos And Donts Of A Down Payment Gift

    Get a signed statement from the gift giver

    Tell the lender the funds are a gift when its a loan

    Remind gift giver to keep a paper trail

    Change or add money without explanation

    Get the money in advance and know how seasoned money works

    Assume all loan types allow down payment gifts

    Understand the monetary limit of gift funds for tax purposes

    Neglect the mortgage loan because you have no money in the game

    A Gift Letter Confirms The Relationship Between You And The Gift Giver

    The Best Loan You

    If you plan on getting gift funds from a friend or family member, youll need a gift letter confirming your relationship to the giver. The letter also must indicate that the money is a gift and that there is no expectation of repayment. Usually, the letter is signed by both interested parties.

    Gift Letter Template

    The lender may also require further evidence of the gift for instance, they may ask to see the gift-givers bank statements to show there are sufficient funds in the donors account to make the gift. They may also ask for a bank slip from the buyers account to show the down payment funds have been transferred.

    Often gifts change hands during the application process. This allows time for the money to show up on both the giver and the buyers bank statements and for the mortgage lender to verify that the cash is from a legitimate source and the pair has an appropriate relationship.

    If the gift funds are added to the buyers bank account after settlement, then documentation will still be required before it can be applied to the purchase. Typically, this will require a receipt of the cashiers check as given to the closing agent.

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