Purchasing a home is by far one of the largest investments you’ll make in your life and saving for the down payment can be one of the most challenging aspects of the home buying process. But you shouldn’t give up hope! There are many affordable ways to attain homeownership: down payment assistance programs, selecting the proper mortgage product, gift funds, etc. If you’re ready to become a homeowner, asking family to assist with your down payment may have crossed your mind. You’re not alone! 24% of homebuyers rely on gift funds as their source of down payment funds. In order to apply gift funds towards your down payment, there are certain rules that must be followed. We’ll breakdown the guidelines, rules and tax implications of gifting funds.
Gift Fund Guidelines
The guidelines regarding gift funds vary depending on your mortgage product. If you’re contemplating the use of gift funds for your down payment, it’s important that you share this with your loan officer. They will be able to determine the mortgage product that will best suit your specific financial situation (i.e. credit, comfortable monthly payment, down payment, etc.). Direct Mortgage Loan’s mortgage products allow for the entire down payment and closing costs to come from a gift.
Documenting the Gift Funds
Once you’ve determined that gift funds are accessible for your home purchase, documenting the gift is important. A gift letter will need to be completed by the donor. That letter includes the following key pieces of information:
- Name and address of the donor
- The amount being gifted
- The property address of the home you’re purchasing
- The relationship of the person who’s making the gift
- Where the funds are coming from (i.e. checking account, savings account, investment account)
- Clear explanation that the money is a gift, and not a loan
(We’ve created a downloadable version for your convenience.)
Note: Eligible donors vary with each loan product. Gifts from family members are always acceptable.
Your loan officer will review the gift letter for completion, and then gather the documents that:
- Verify gift funds in the donor’s account
- Deposit of funds in your account
Typically, a bank statement is used to document this process.
Gift Fund Tax Implications
As the beneficiary of gift funds, you wouldn’t incur any tax liabilities, regardless of the gift amount. However, your family member could be subjected to the gift tax if the amount exceeds the annual exclusion limit. It’s important to discuss the potential tax implications with your donor. As you consider gift funds for your source of down payment, visit with your tax professional to ensure your donor is not at risk of increasing their tax liability.
Link for Gift Tax: https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes