I’m getting married in July, and we’re hoping to buy a house when our lease is up in September. We’ve spent a fair chunk of change on our wedding, but (fingers crossed!) we’re hoping to get at least some of the money back as wedding gifts, and some of our relatives have hinted that that’s what we’ll be getting. Don’t get me wrong: I’m pretty darn excited to get a toaster oven, nice dishes, stemware and all that, but I certainly won’t turn down money for a down payment.
You might think that you can just use whatever financial gifts your friends and family give you for a down payment, but using gift money is not as cut and dry as you might think. Whether you have $20 or $20,000, the source of the funds in your bank account will matter just as much as how much money you actually have. To understand why the source of your funds matters to your mortgage company, you’ll first need to understand what underwriting is and how it impacts your loan. Then we’ll go over some frequently asked questions and important things to know about receiving gift funds.
Underwriting refers to the process in which your lender looks at your credit score, income and assets to determine how risky it would be to lend you money. When underwriters look at your assets, they check to make sure that the money in your account is indeed your money – they want to make sure any large deposits (other than something regular like your paycheck) are your actual assets. This includes making sure any deposits in your account from friends and family that you plan to use for a down payment are gifts, not loans.
This is essential to ensuring that you can actually afford your mortgage payment and that you’ll be likely to pay the loan back. If you used a personal loan to qualify for a home loan, chances are you’d be left with a big financial mess once you had to start paying both loans back.
So how can an underwriter establish that deposits in your bank account are gifts and not loans? They’ll need the gift-giver to write a gift letter. Let’s take a look at what that means.
What Is a Gift Letter for a Mortgage Down Payment?
As it applies to your mortgage, a gift letter is a note from the donor that says you don’t have to pay the money back. If you’re using gift money as part or all of your down payment, you’ll need the donor to write a gift letter to your mortgage company that makes it clear that the money is a gift and not a loan. Here’s what your gift letter should include:
- The donor’s name, address and phone number
- The donor’s relationship to the client
- The dollar amount of the gift
- The date the funds were transferred
- A statement from the donor that no repayment is expected
- The donor’s signature
- The address of the property being purchased
It’s important to understand that the gift letter in itself may not be enough evidence for the mortgage company. If you’re getting an FHA loan, the person who gives you the funds will be required to provide a bank statement in addition to a gift letter – so you’ll probably want to let your generous friend or relative know this upfront.
Gift Money and Property Type
One thing to consider is that the amount of gift money you use in relation to how much of your own money you put down may impact what kind of loan you can get. Here are some rules about gift money as it relates to different types of properties.
Keep in mind that these rules are subject to change based on lending regulations – so check with your mortgage company for up-to-date guidelines.
If you’re getting a primary residence, you can use gift funds for your down payment. These guidelines apply:
- If it’s a single-family home, you can always use gift funds without having to contribute any of your own money to your down payment.
- If it’s a multi-family home, you can get a home without having to contribute to the down payment as long as the down payment is 20% or more. If your down payment is 20% or less on a multi-unit home, you have to contribute at least 5% of your own funds to your down payment.
If you’re getting a second home through a conventional loan (you can’t get them through the FHA, USDA or VA), the following guidelines apply regarding gift limits:
- If you’re making a down payment of 20% or more, all funding for the down payment can come from the gift.
- If it’s less than 20%, 5% of your down payment must come from your own funds.
How the Timing and Amount of Gift Money Impacts Underwriting
After my wedding, I’ll (hopefully) have checks to deposit – but I don’t want these deposits to cause problems when I’m trying to qualify for a mortgage. Let’s go over some further details on how gift money impacts underwriting.
Quicken Loans requires a 60-day history of assets for qualification purposes. As long as you have documentation for the past 60 days, your mortgage company can take it from there.
So, within that 60-day period, which deposits do you have to worry about getting a gift letter for? Grab your wedding veil and jump into this hypothetical situation with me for a moment.
You just got married. Aunt Sue gave you a $75 check, but Grandma Betty gave you $10,000 for tying the knot (you’ve always suspected you were the favorite grandkid). Will you need gift letters for both deposits?
In general, your underwriter will need to verify the source of any large deposit. What’s the criteria for “large deposit”? It’s any single deposit that exceeds 50% of the total monthly qualifying income. This is for conventional, VA and jumbo loans. For FHA and USDA loans, a large deposit is defined as any deposit that is greater than 1% of the adjusted purchase price or appraised value, whichever is lower.
Let’s say you are doing a conventional loan for our example. If you make $4,000 a month, any deposit over $2,000 would probably be questioned by your underwriter. Therefore, the underwriter will probably want to verify that Grandma Betty’s $10,000 gift is a gift, not a loan, so you’ll need to ask her for a gift letter. Aunt Sue’s gift, however, is small enough that the underwriter might not question it.
Of course, this is partially up to the underwriter’s discretion. If there are any deposits that seem to be out of the ordinary, your underwriter may question them regardless of your income. If you normally had $2,000 in your checking account and you suddenly have a deposit for an extra $8,000, they would want to verify that regardless of the purchase price/appraised value or qualifying income. We would dig deeper into that situation, just to make sure the situation checks out. While your Aunt Sue’s small gift might not be questionable in itself, if the underwriter finds that it’s out of the ordinary, he or she may require gift documentation.
Gift Money FAQs
Now that we’ve gone over the basics of gift funds, we’ll answer a few of your common questions.
Who Can Give Me a Down Payment Gift?
Depending on the type of loan you’re getting, there are differing guidelines regarding who may give a down payment gift to you. Let’s briefly go over those.
if you’re getting a conventional loan through Fannie Mae or Freddie Mac, the gift has to come from family. For the purposes of your mortgage, family is defined as follows:
- Parent (including step and foster)
- Grandparent (including great, step and foster)
- Aunt/uncle (including great and step)
- Niece/nephew (including step)
- Cousin (including step and adopted)
- In-laws (including parents, grandparents, aunt/uncle, brother and sister-in-law)
- Child (including step, foster and adopted)
- Sibling (including step, foster and adopted)
- Domestic partner
If you happen to get a loan from Fannie Mae, they also allow gifts from future in-laws.
With FHA loans, nearly all of the above are considered family who can give you a gift, including future in-laws. However, some caveats apply.
While cousins, nieces and nephews aren’t able to give your gift under normal family guidelines with an FHA loan, the FHA does allow for gifts from close friends who have a clear interest in your life. This can include extended family like cousins, nieces and nephews and even former spouses.
In addition to the close friend guideline, the FHA also allows for gifts from the following:
- Labor union
- Charitable organization
Finally, you can receive funds from a government agency or public entity that provides homeownership assistance to low-to-moderate income or first-time home buyers.
USDA and VA Loans
The USDA and VA don’t place very many restrictions on who can give you a gift. The only stipulation is that it can’t be an interested party. An interested party is someone who is involved in the transaction directly or indirectly. This includes, but isn’t limited to:
- Real estate agent/REALTOR®
How Much Can You Gift for a House?
There’s no limit to the amount of money that someone may gift for a house. However, you may or may not have to report the gift on your taxes. We’ll go over the limits for that below.
How Much Money Can Be Gifted for a Mortgage?
Similarly, there are no limits on how much someone can give you for a mortgage down payment or closing costs. The only stipulation is that mortgage investors may require you to contribute a portion of their own funds to the down payment depending on the loan and property type. Those guidelines are outlined above.
How Much Can You Gift Someone Tax-Free?
Tax laws change on a fairly regular basis, and you should always speak with your financial advisor or tax professional in order to make sure you’re in compliance with the most current law.
With that in mind, here are the most current guidelines for the 2018 tax year.
For tax purposes, gifts and estates are bundled together.
The amount you can exclude from your taxes between gifts to people and whatever you leave behind in your estate is $11,180,000. Any estates or gifts left below that amount aren’t subject to taxes.
In addition, as of 2018, you can now gift up to $15,000 per year to people without having to report it and count the amount toward your gift tax limit. This is also on a per person basis, so if you wanted to donate $15,000 to each of your grandchildren’s college funds, you could.
Typically, this tax is paid by the donor. If you agree that the recipient will pay the tax, talk to your tax professional.
If you know that you’ll be getting any financial gift to help with your down payment, be prepared to document it for your mortgage company. Do you still have questions about using gift money for your down payment? Get started online or give us a call at (800) 785-4788 to speak with one of our Home Loan Experts!
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