If you're planning to buy a home with financial help from a family member, you should know the ins and outs or mortgage gifts. We explain gifts in more depth here!
Know a friend whose parents gave them money to help them buy a house? Maybe you received a graduation gift in the form of cash? Do you have a lump sum of cash from a relative to be used towards a down payment? All these examples fall into the category of a gift.
What is a Mortgage Gift?
If you receive cash from someone and you use the funds for your home purchase, a lender will require you to submit documentation showing a couple of things:
- The money exchange (dates of transfer, paper trail, etc.)
- A gift letter
What is a Gift Letter for a Mortgage?
A gift letter is proof to the lender that the funds were gifted to a homebuyer for their home purchase, and not a loan or borrowed money. Smaller gifted amounts, like $1,000 may not require a gift letter, but it’s dependent on your income, the donor’s amount, and your loan type.
What is Included in a Gift Letter?
- An explanation of the relationship between the donor and homebuyer.
- An explanation of who is gifting the cash.
- An explanation of where the cash is coming from.
- Signatures from both parties.
- The address of the property being purchased.
- The donor’s name, address, and phone number.
Additionally, copies of the donor’s bank statements may be required by the lender.
What Can Gift Funds be Used For?
Depending on the loan type and how much the gift money amounts to, the funds can be used toward the:
- Down payment
- Closing costs
- Reserve requirements
Do All Loan Types Accept Gift Funds?
A wide range of mortgage programs allow gift funds, but the amount allowed may vary along with who is considered an acceptable donor. Here are a few examples:
Conventional Loans
Acceptable donors can include spouses, siblings, parents, grandparents, cousins, aunts and uncles, nieces and nephews, children, and in-laws.
Your entire down payment can be funded with gift money if your down payment is at least 20%. For down payments less than 20%, typically part of the down payment may be gifted while a portion may be required to come from your own personal funds. That’s why working with a lender to determine what your situation could look like is best.
FHA Loans
FHA loans are popular among first-time homebuyers because they accept a 3.5% down payment. The down payment may be fully funded by gifted money.
VA Loans
While VA loans don’t require down payments, the gift funds may be used for closing costs.
USDA Loans
USDA Loans do not require down payments, but like VA loans, the gifted money may be used for closing costs.
Tax Penalties and Gift Funds
While not all gifts are taxed by the IRS, some are, and it’s all dependent on the gift amount. This year, the IRS states that a donor can gift up to $16,000 to one person without a tax penalty1.
Can You Use a Gift Fund for Other Home Purchases?
Most commonly, gifted funds are used by first-time homebuyers to help with the upfront costs. If you’re wondering whether gift funds can be used for a second home, vacation house, or investment property, the answer is yes, but with a caveat. In these instances, homebuyers are required to pay a portion of the down payment out of pocket.
Another Down Payment Source to Consider
While saving money on your own and gift funds are great options to source down payment funds, below is an underused option to consider.
Down Payment Assistance Programs
Down payment assistance programs for homebuyers, largely for first-time homebuyers, are funds administered by cities, counties, housing finance agencies, nonprofits, lenders and other groups, and in some high-cost areas, even employers. These programs vary widely across state and even county lines. DPA programs can save homebuyers thousands of dollars. And the best part is that there is no repayment necessary!
The Bottom Line
If you’re in a position to use gift funds towards your home purchase, working with one of our loan officers to walk you through the necessary steps can help you achieve your homeownership dreams with less stress. To get a head start on your home buying journey, get pre-approved today!
