Most Government Home Loan programs allow gift funds to be used as a down payment. A gift simply money used to purchase a home that has not been saved by you. Gift money is extremely common in the world of real estate but if you receive a gift, you should know that there are strict requirements and guidelines you must follow.
The documentation needed when using a gift includes a verification of the donors available funds, verification of the funds transfer, and a gift letter signed by all parties. To receive a free copy of the gift letter template simply fill in the form below.
But don’t stop there! We have much more information about gifts. By reading this article to completion, you will know exactly what to expect and how to have your gift approved by the bank the first time.
Gifts for downpayments and closing costs can come from parents, grandparents, siblings, or children. They sometimes come from spouses, too.
Mortgage lenders allow cash gifts for a downpayment on a huge array of loan programs including USDA, FHA, and conventional loans.
However, if you’re getting a cash gift for downpayment, you’ll want to make sure that you “receive” your cash gift properly. Sourcing deposits is very important.
There’s a specific way to receive money for a downpayment. Should you receive your gift improperly, your lender is likely to deny your home loan application. It’s imperative that you follow the rules of cash-gifting for a home.
USE OF GIFT FUNDS IS COMMON
It is common for today’s Plattsburgh buyers to receive cash downpayment gifts. First-time home buyers are most likely to receive a cash gift among all buyer types, but repeat- and move-up buyers receive them, too.
according to the Mortgage Reports, the largest driver for today’s gifts of equity is the want of U.S. buyers to make a 20% downpayment.
With a 20% downpayment, home buyers can often qualify for the lowest mortgage rates offered by their bank; and with 20% down, there is no accompanying private mortgage insurance (PMI).
Furthermore, with 20% down, buyers can seek loans backed by Fannie Mae and Freddie Mac.
Not everyone receiving a cash gifts want to make a 20% downpayment.
Cash gifts are also allowed for low-downpayment mortgages including the FHA purchase mortgage, which requires a 3.5% minimum downpayment, and the 97 program financing rom Fannie Mae and Freddie Mac which requires just 3% down.
Excess gift monies can be used for furnishing a home; making repairs; or the establishment of an emergency fund.
WRITE YOUR “DOWNPAYMENT GIFT LETTER”
When you accept a downpayment gift, remember that there’s a right way and a wrong way to do it. For example, you cannot randomly deposit your cash gift into a bank account. Doing so will get your loan denied.
There’s a 3-step process when accepting a cash downpayment gift and no matter what your loan type — Conventional, FHA, VA, or other — the 3-step process is the same. Follow the rules to the letter.
First, write a gift letter that follows the includes the following information :
The amount of the giftThe subject property addressThe relationship of the gifter to the gifteeA note that the gift is actually a gift and not a loan and will not be repaid
The gift letter should be only as long as needed and should not contain “extra” information. Have all parties sign and date the letter. Set the letter aside — you’ll come back to it in the section below.
HOW THE GIFT-GIVER SHOULD DOCUMENT YOUR GIFT
With your mortgage downpayment gift letter written, you’ll want to make sure you don’t violate the rules of “taking a gift”. In order to do that, make sure to keep an extra-strong paper trail for the money being gifted.
If you are the person who is gifting funds to the buyer, for example, and you sell your personal stock holding as part of the downpayment gift process, you will want to make sure that you document the sale of your stock as well as the transfer of funds from your brokerage account into the account from which you’re making the gift.
Do not make the transfer without a proper paper trail.
Next, you’ll want to write a check to the home buyer for the exact dollar amount specified in the gift letter you’ve written. Photocopy the check. Keep one copy for your records and give one copy to the buyer — the lender will want to see it as part of the process.
Note that writing a check will require more steps and will require more effort than simply wiring funds to the buyer. Be okay with these extra steps. It’s simpler for a lender to document and track a personal check than it is to track a wire; and it’s good to make things simple for the bank.
HOW TO DOCUMENT YOUR DOWNPAYMENT GIFT
Now that the giftor has handed in the form of a check, a downpayment gift to the buyer, the following steps are required.
First, with the gift check in hand, the buyer should physically walk into a preferred depository bank (e.g.; Wells Fargo, Bank of America, Chase, Huntington) to make the deposit in-person. Do not deposit the check online using an iPhone or Android app; or at an ATM machine.
In addition, into whichever bank account you deposit your gift money, make sure it’s the same bank account from which all of your money at closing will be drawn. You do not want to bring money to closing from multiple savings accounts. This, too, can make things difficult on a bank and the goal is to keep things simple.
When you get to your branch, do the following :
Under no circumstances whatsoever should you “co-mingle” your gift deposit with other monies, nor with other gifts. The amount specified on your teller receipt should match exactly the dollar amount on the certified down payment gift letter.
If the amount is off by even a penny, the lender will likely reject your letter and the funds that came with it.
Note that if you are receiving multiple cash gifts for down payment, you should follow this process for each gift independently. Again, do not co-mingle your gifts. Be guided by your gift letter.
BONUS: TAX NOTES ON CASH DOWN PAYMENT GIFTS
It should be noted that there may be tax implications for givers of a cash gifts for down payment, and receivers of them. These are discussion points with your accountant.
And, remember that your lender will not report cash gifts to the IRS; it’s not the lenders responsibility to report such things. Your lender will use your gift letter(s) for underwriting only, in an attempt to approve your loan.
Everybody’s tax situation is different and personal circumstances are rarely addressed in-full by websites or web resources. Speak to your tax professional prior to making or receiving a cash gift for down payment.
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