Coming up with a down payment to buy a home may not be easy, especially for a first-time buyer who needs 20% to secure a home in our market. Some buyers leverage monetary gifts when putting together their down payment; according to the National Association of Realtors, 27% of first-time buyers in 2013 relied on gifts. This approach can speed up the process, but there are rules about paving the road to homeownership with gift money.
The funds must come from your immediate family – parent, grandparent, sibling – or from your spouse, domestic partner or fiancé(e). Some exceptions may be made to allow gifting from a non-relative on a case-by-case basis.
The portion that can be gifted depends on how much of a deposit you are putting down and the type of loan you are taking. If you are depositing 20% or more on a conventional loan, the entire deposit can be funded through gifting. If you are taking an FHA or VHA loan, your credit score becomes a factor; if it has fallen below a predetermined threshold (620 at this writing), you will be required to pay a minimum percentage (3.5%) yourself.
In most cases, documentation in the form of a gift letter will be required. The giver will need to document the amount, the date given, and that there is no expectation of repayment; you and they will need to sign it to attest to its accuracy. Some lenders may also require copies of bank statements to confirm the funding, timing and transfer. Why do lenders care? They want to make sure that you can afford the loan they are considering giving you. Gift money is perfectly acceptable, but if friends and family are giving you loans with an expectation of repayment, that will affect your debt to income ratio – a key figure lenders use to assess you as a risk.
Many people use the accumulation of their wedding gifts towards a down payment on a honeymoon home, but wedding gifts can range from hundreds to thousands of dollars. Will you need to get gift letters from all of your guests? Probably not. First, lenders look as is approximately 60 days of financial history; if you begin your prequalification process more than 60 days after your wedding, the money will be in your account when the lender begins their assessment. Secondly, it’s not likely a lender will want a letter from each of your many guests, but relatives who have given large monetary gifts may need to document that these are not loans to ensure that you have not incurred new debt. How do you determine what constitutes a large gift? Any single gift that exceeds 50% of the monthly qualifying income should be documented.
The IRS imposes a tax on monetary gifts; in this case, the tax would be paid by the giver unless otherwise stipulated in your agreement. As of this writing, individuals can give up to $14,000 in gifts without paying tax; couples can give up to twice the amount to one child and four times the amount to a child and spouse, and remain under the tax threshold. Tax laws may change, so check with a tax expert to make sure everyone is in compliance.
These days, when home prices are so high, many parents and grandparents are choosing to gift their younger family members, preferring to help them now rather than make them wait for a bequest. Their generosity enables young people to get settled and build equity rather than pour their money into monthly rentals. If you are one of the lucky people on the receiving end of this generosity, be sure to comply with these procedures to meet the requirements of your lender’s underwriters, and you will certainly find the home and the financing that best suits your needs.