The Top 5 Considerations When Using a Gift for a Down Payment
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When purchasing a home, many buyers want to put down the largest amount they can realistically afford. The funding for the down payment can come from a variety of places, and sometimes it comes in the form of a gift. If you’re on the receiving end of a down payment gift, what are some considerations you need to think about?
1. Identify which type of loan you’re using
Different loan types have different requirements when it comes to using a gift for a down payment. If you are using a conventional loan, your whole down payment can be gifted if you put down 20% or more. If you’re putting down under 20% on a conventional loan, you’ll need a combination of gift funds and your own money; however, if you’re using an FHA or VA loan, your whole down payment can be gifted. Make sure to talk to your loan officer to verify that the gift is from an acceptable donor relationship based on your specific type of loan.
2. Get your paperwork in order
Your lender will need documentation about where the gift is coming from. You’ll have to provide a gift letter that includes:
- The names of the donor and recipient,
- Their relationship,
- The date of the gift,
- The amount of the gift, and
- A statement verifying that it is a gift and not a loan.
Your loan officer will help you with this piece and ensure all necessary information is included.
3. Know the tax limits
It would be great to receive unrestricted monetary gifts, but unfortunately that’s not how it works. The 2019 gift limit is $15,000. If the gift is coming from your parents, they could each gift you and your spouse $15,000 without incurring tax implications. You and the gift donor may want to speak with a tax expert to confirm you are within the limits and will not incur any additional taxes.
4. Get the money ahead of time
Don’t wait until the last minute to get the gift funds. Make sure you have enough time to finalize the gift letter, verify the funds, and transfer the gift to your account. All of this needs to be done well before closing, so work with your lender to make sure you’ve got enough time for everything.
5. Confirm that it’s a gift, not a loan
Here’s where it is important to have a conversation with the person giving you the gift. Gifts and loans are viewed very differently during the mortgage process, so you need to make sure you’re receiving a gift and not a loan. If the person expects you to pay the money back to them over a certain period of time, that’s considered a loan, and your lender will need to factor that into your debt-to-income ratio.
It’s important to think through the implications of using a gift for your down payment. Working with a mortgage expert will make the process much easier, so call us today if you’ve got questions!
This does not constitute tax advice. Borrowers should consult their own tax advisers regarding the tax consequences and deductibility of mortgage interest and/or property taxes.