Using a Cash Gift to Purchase a Home in 2019
If you are receiving a down payment gift for the purchase of your next home, You are not alone. Many 2019 home buyers use gift funds to purchase their first home. We understand that many lenders will simply say, ” you will need a gift letter ” and not explain any further. You can download a gift letter template below which will work for any FHA, USDA, or VA Home loan.
Gifts for down payments and closing costs can come from parents, grandparents, siblings, or children. They sometimes come from spouses, too.
Mortgage lenders allow cash gifts for a down payment on a huge array of loan programs including USDA, FHA, and conventional loans. However, if you are getting a cash gift for down payment, you will want to make sure that you “receive” your cash gift properly. Sourcing larger deposits is very important since the passing of the Patriot ACT.
There is a specific way to receive money for a down payment. Should you receive your gift improperly, your lender is likely to deny your home loan application. It is imperative that you follow the rules of cash-gifting for a home.
Download a Mortgage Gift Letter
Use of Gift Funds is Common
It is common for today’s Plattsburgh home-buyers to receive cash down payment 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 and cash gifts is the banks need for U.S. home buyers to make a 20% down payment.
With a 20% down payment, 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 gift will make a 20% down payment. Cash gifts are also allowed for low-down payment mortgages including the FHA purchase mortgage, which requires a 3.5% minimum down payment, and the 97 program financing offered by 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 "Down Payment Gift Letter"
When you accept a down payment gift, remember that there is 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 is a 3-step process when accepting a cash down payment gift. No matter what your loan type — Conventional, FHA, VA, or other — the 3-step process is the same. Follow the rules to the letter.
1. Write Your "Down Payment Gift 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 down payment 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 down payment 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.
2. Transfer the Check
Next, you’ll want to write a check to the home buyer for the exact dollar amount specified in the gift letter you have written, Photocopy the check, and keep one copy for your records and give one copy to the buyer (the lender will want to see a copy as part of the loan process).
Please 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 is 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 DOWN PAYMENT GIFT
Now that the giftor has handed in the form of a check, a down payment 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 :
Deposit the gift funds into a bank account and Collect a receipt for your deposit
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 DOWNPAYMENT 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 downpayment.
Mortgage rates are near their lowest point in history. Homes are affordable and lenders have simplified the process of getting approved for a low- and no-down payment mortgages.
This post was written using information from various third party sites
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