Gifting down payment money? What you need to know.
Minneapolis, MN: A relative, usually a child has asked you to give them down payment money to buy a home. As parents, we are usually very willing to help. Here we will explain gift for down payment money – what you need to know.
First, the gift has to be from a blood relative. There are two major and different gift rules. One being the rules for gifting money on a conventional loan, the other gifting money for an FHA loan.
Gifted down payment typically involves extra paperwork for the person giving the gift. At a minimum, the gifting person must sign a gift letter. The gift letter has the name of the person giving the gift, their relation to the recipient, the amount of the gift, where the gift money is coming from (bank), and the fact that it is a true gift, and that the gift will never be paid back.
The rules require the gift come from a blood relative, and are designed to ensure the gift really is from the relative, not some sort of kickback from the realtor or seller. Lenders will require various levels for paper trailing the gift depending on the transaction type (conventional or FHA).
THE ACTUAL MORTGAGE GIFT LETTER
The mortgage industry uses a standard mortgage gift letter. Be sure to tell your Loan Officer you want to use a gift for down payment, and they will provide you with the required letter. Do NOT try writing your own.
FHA DOWN PAYMENT GIFT
On an FHA loan, the entire amount needed to buy the home, both the actual down payment and any closing costs can be a gift. FHA rules require the signed gift letter, and also requires we get proof the giftor had the money to give, which means we need to see a copy of the bank statement of the account the money came out of.
PROOF OF GIFT
FHA requires proof the giftor had the money to give. This means the giftor must provide the lender with the most recent bank statement from the account the money is coming from to prove they had the money to give. Lenders will also need to see the money deposited into the buyers account, and may even request a copy of the cancelled check from the giftors account.
Alternatively, the giftor can electronically transfer the money, or give the buy a cashiers check. If giving a cashiers check, the buyer should NOT deposit the check. Rather, just bring the original cashiers check to closing. The lender will also need a copy of the cashiers check before closing.
Bank wire transfer from the giftor directly into the Title Company a few days before closing is also allowed, but we still need a copy of the giftors bank statement, and make sure the wire comes from the exact same account listed on the gift letter and bank statement they provided.
CONVENTIONAL DOWN PAYMENT GIFT
On conventional loans, many times, we just need just a signed gift letter. Just like on an FHA loan, the letter (provided by your lender) will state the money is a true gift, and no repayment will ever be required.
UPDATED 2018: Current guidelines on conventional loans allow for 100% of the down payment (and closing costs) to be a gift
The amount of the down payment gift is different on conventional loans: – If the gift is 20% of more of the purchase price, the entire down payment can be a gift – If the gift is less than 20%, the FIRST 5% of the down payment MUST be the buyers own money.
PROOF OF GIFT
Proof the gift actually came from the gifting person on conventional loans varies depending on how the gift was given.
If they gave you a personal check, just like FHA loans, we need to see the giftors bank statement showing they had the money to give, AND prove the money now in the recipients account.
If they give a cashiers check, the check MUST have the donors name in the Memo field on the check. Make sure the bank puts it there! The recipient should NOT deposit the cashiers check. Send a photo copy to your lender, and bring that exact same cashiers check to closing.
Finally, the giftor can do a bank wire transfer of the gift amount directly into the Title Company a few days before closing. Make sure the money is wired from the exact same account listed on the gift letter.
We often times see the gift giver reluctant to share bank statements with the gift recipient. We understand. They often do not want the person receiving the gift to see what they have in their accounts. This isn’t a problem, as the gift giver can send the bank statements directly to the lender… and we promise to never share that account information with the gift recipient.
TAXES on Down Payment Gifts?
I often get asked if there is a gift for down payment tax. My best advice is to always consult a tax professional, as I am not. But in consulting my personal tax professional, here are some of the main items he indicated.
The recipient of the gift has no tax liability. It’s a gift.
For the giftor, the general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.
- Gifts that are not more than the annual exclusion for the calendar year (slowing going up every year, so check for the current number).
- Tuition or medical expenses you pay for someone (the educational and medical exclusions).
- Gifts to your spouse.
- Gifts to a political organization for its use.
- In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.