Down payments can be gifted but there are a few requirements om doing so, or the gift giver and recipient will face trouble later.
Not just anyone can gift a down payment. Cash can come with strings attached, which could affect the borrower’s ability to repay the mortgage, so lenders want to protect themselves. They want to make sure that gift money is actually a gift and not simply a loan.
Gifts for conventional loans must be given by a relative. Relatives include children, a spouse, other dependents, or anyone related by blood, marriage, adoption, or legal guardianship.
FHA loans allow relatives as well as others to gift towards the down payment including friends (“with a clearly defined and documented interest in the borrower”), labor unions, and employers as well as relatives.
Here is a list of people who cannot gift down payment money to homebuyers:
In both types of loans, the total amount of the down payment can be gifted (in most cases). The amount of money needed for a down payment is based on the credit score of the borrower (you can check out some of our other blog posts to get more information!)
The transfer is usually made at closing or close to closing to make sure that the money is used for the home purchase. In any case, there must be a down payment gift letter. It is simply a statement which explains who the donor is, how much money is being gifted, where that money is coming from, and that they do not expect to be repaid. It should also include when the funds were transferred and the giver’s contact information. Both the giver and the home buyer must sign the letter and it does not have to be notarized. Conventional loans require extra steps if the down payment is made up of gift money and the borrower’s own money. The relative or partner must prove that they have lived with the homebuyer for the past 12 months and will continue to live together in the new house.
Buyers need to provide lenders with proof that they have received the down payment money. This can be done with:
According to the IRS, the recipient of the down payment gift does not need to report the gift to them or pay gift or income tax on its value.
If you are being gifted your down payment, don’t worry! We will keep you updated on exactly what you will need to provide the lender in each case as long as we know about it! Get a free consultation and qualification with A Plus Mortgage today! Call or text us at (954)559-4644
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