Who doesn’t love gifts? Here’s how to properly use the gift of money towards your down payment on a home purchase.
Let’s say you’re purchasing a new home in Raleigh, NC and you received a $10,000 gift from your parents to use as a down payment. Great! Most first time home-buyers are recipients of down payment gifts. Just make sure that you receive the gift in a manner that will be accepted by your loan program.
To use a gift properly, a few things need to happen.
- The gift must be documented by a “gift letter”
- There must be a paper trail to prove that the gift moved from the giftor’s bank account to the new home buyers account. AKA – don’t take cash!
- The gift can’t secretly be a loan. This means you can accept up to 6% of the homes purchase price as a gift for a down payment.
The good news is that if you receive your gift in a proper manner, most loan programs such as VA, USDA, Conventional, and FHA will accept the gift! If you don’t receive it properly, the lender has the power to reject your loan. Another bonus of receiving a gift is if the gift amount allows you to put 20% down, you don’t have to pay mortgage insurance
Gift Letters Should Include The Following:
- The donor’s name, address and phone number
o Ex – Sally Brown – 123 Green Street Virginia Beach, VA – 704-602-2446
·The donor’s relationship to the client
·The dollar amount of the gift
· The date the funds were transferred
· A statement from the donor that no repayment is expected
·The donor’s signature
·The address of the property being purchased
What Qualifies as a Gift?
A large amount of money deposited into the home buyers bank account usually qualifies as a gift. So, what is a “large amount”? It’s any single deposit that exceeds 50% of the total monthly qualifying income. This is for conventional, VA and jumbo loans. For FHA and USDA loans, a large deposit is defined as any deposit that is greater than 1% of the adjusted purchase price or appraised value, whichever is lower.
Imagine if you were buying a fancy new townhouse in Nashville, TN that you are super excited about. You’ve submitted all of your documents and and your loan has been sent to the underwriter – so close! But then the underwriter sees a large amount deposited, say $8,000 without a gift letter, it may get sticky. This is why it’s always important to document large monetary deposits prior to buying a home!
What About Taxes?
Great Question! Any questions about taxes on the gift should be directed to your tax professional, as every situation is different. There may be tax implications for both the giftor and giftee so it is important to discuss that with a professional prior to the gift being given. As of 2019, the annual exclusion for gifts is $15,000, meaning the giftor can give up to that amount without having to report it to the IRS.
Now that you are well versed in the world of down payment gifts, you are one step closer to becoming the most informed home buyer! If you want further information about down payment gifts give us a call at 704-602-2446.
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