Everyone likes presents, how could you not? Presents are physical and emotional gifts from one person to another. You get a reminder that a friend or family member cares about you, sometimes in the form of a tangible gift. A present during your home buying process may be the sweetest gift of all. No, I’m not talking about having a house bought for you; in this week’s Know Your Mortgage, we’ll explain down payment gifts and how to properly file them.
What Is a Down Payment Gift?
A down payment gift is when a family member or friend gives you the gift of cash to cover part (or all) of your down payment. For a refresher, a down payment is a percentage of your home’s cost that you pay before closing to secure said home. If your down payment is 20% of your home’s value, you’re going to get the best possible interest rate (not required at all, but it’ll make your monthly payments better). That being said, if you can front some of the down payment and have a gift push you to 20%, then you’ll be looking good. Keep in mind that not all loans require a 20% down payment; FHA loans only require 3.5% and other types vary from both of those. Research your loan’s down payment specifics before you have family gifting you more money than you need.
How Do I File a Down Payment Gift?
It’s an intricate process but a necessary one. After you have your donor and gift amount lined up for your down payment, you’ll need to have the donor fill out a gift letter. This gift letter must include the following:
- The cash amount you are being gifted
- The address to the subject property you’re looking to acquire with this gift
- Your relationship to the donor
- A note stating the gift is a gift and not a loan
This last point cannot be stressed enough– both parties must share the understanding that the money received is not to be repaid.
When you go to get this gift money transferred, make sure the paper trail can be seen from the moon. If borrowers notice anything shady in the way this money was given to you, they’re required to back out of the arrangement. Have your donor write the check for the gift and get it photocopied-in fact, have a copy of every receipt involved in this process. Don’t have money randomly deposited into your account for the gift– it looks shady. Instead, have a bank account that’s just for that gift, and deposit the check as soon as you can. If you have multiple gifts from multiple sources, have them in separate accounts so the borrower can see your whole transaction history. Again, keep track of all receipts and documents associated with any transaction in this process (no matter if you’re the one giving or receiving funds).
Keep in mind there are tax implications that you must file, especially if the gift you receive is over $13,000. This is your responsibility if to take care of, not the lender’s or the gift giver’s. Have any lingering questions about gifting funds for a down payment? Comment below!