Last Updated on September 6, 2022
Remember when you were little and grandparents asked you what you wanted for your birthday? You likely handed them a detailed list of toys and clothes you’d like to add to your growing collection.
These days the answer to that same question is probably a little easier: You’d like cold, hard cash.
Why? Because being an adult is expensive, Grandma. And because you’ve been saving every last dime for a down payment so you can give your roommate a 60 day notice and get your own place.
Down payment gift money
What is down payment gift money?
When it comes to buying a home, a down payment of 20% is the amount lenders prefer. However lenders are human too, and understand not everybody, first time homebuyers, especially can come up with that money.
This is when your above mentioned Grandma comes in handy.
Whether it’s $2,000 or $20,000, having someone gift you the money for your down payment and other costs associated with the purchase of your home reduces your burden, although it can potentially complicate things.
But before you accept down payment gift money, it’s important to understand the guidelines you’ll have to follow.
Can you use gift money to cover closing costs?
Yes, you can use gift money on most loan programs for down payment and/or closing costs.
One of the things that surprises home buyers is closing costs, which are costs associated with the loan process that are paid at closing. You may also hear them referred to as settlement costs.
In general, closing costs range anywhere from 2-5% of your home’s total purchase price. For a home priced at $250,000, you could be on the hook for $5,000 to $12,500, come closing time.
Don’t panic if you didn’t plan for this expense. Lenders will allow you to use gift funds to cover closing costs.
Down payment gift rules
The amount of money you’re eligible to receive as a down payment gift and from whom depends on the type of mortgage loan.
If you’re going the Fannie, Freddie, or VA Mortgage route, the gift can come from an immediate or closely extended family member only. Cue your happy dance because your entire down payment can be from a gift.
On the other hand, If you’re going with a FHA mortgage you have more options. You can receive gift money to use towards a down payment from the following:
- Family or close extended family
- Labor unions*
- Government agency
- Nonprofits that provide assistance to first-time home buyers.
*Check the HUD guidelines and be sure to talk to your lender about gifts from your employer or labor union.
The entire down payment of a FHA loan can be from a gift, too. However if your credit score is less than stellar, some lenders may require to fork over some cash, too. Just check with your lender to be safe.
Down payment gift letter
Suppose you did score a generous gift from a family member. How do you apply this towards your down payment?
You’ll need that family member to fill out some paperwork. Owning a home is a big responsibility and banks will want to make sure that any gifted funds you’re coming to the table with aren’t actually loans disguised as gifts.
The gift letter needs to include:
- Donor’s contact info and relationship to you.
- All gift specifics— the exact dollar amount, date the funds were transferred, and the address of the home you intend to purchase using the funds.
- Make sure the letter is signed and also states that the gift funds are indeed that, i.e., she doesn’t intend to come collecting on those funds at your next family reunion.
Do you have to pay taxes on down payment gift money?
Before you accept a large sum of cash, you may be wondering what the tax implications are for for receiving a down payment gift.
The good news is that as the lucky person receiving the gift funds, you wouldn’t be responsible to the IRS regardless of the amount of the gift.
Down payment gift tax consequences
The same can’t be said for the gift giver if the amount given to you exceeds a certain amount.
For instance, parents can give up to $30,000 per child while other family members, such as aunts, uncles and grandparents can give up to $15,000 for a mortgage down payment without tax implications.
If you know that you will be receiving down payment gift funds to help purchase your home, reach out to your Allen Tate Mortgage Consultant to help walk you through the gift guidelines.