Rules for Down Payment Gifts
When buying a home with a conventional loan, 20% is the standard amount that lenders prefer for down payments. Oftentimes, this amount is difficult to come by. While it is acceptable for relatives to give you the money for the down payment, there are certain rules which apply and you need to be aware of the guidelines to follow.
The money you use must come from a family member such as a parent, grandparent or sibling. If you’re engaged to be married, it’s okay to accept money from your fiancé. The person giving you the money must be willing to acknowledge that there is no expectation of repayment.
If you’re paying 20% or more for your down payment, all of that amount can be gifted by someone. However, if you’re putting down less than that amount, part of the money can be a gift but you must pay some on your own. Your lender will advise you of the amount of the split.
If you are taking out an FHA or VA loan, the entire down payment can be gifted as long as your credit score is below a certain minimum threshold. You would be responsible for paying at least 3.5% of the down payment yourself.
Regardless of what type of loan you’re getting, a down payment gift is only acceptable when you’re purchasing the home as your primary residence or second home.
You will be required to provide some detailed documentation of how the down payment will be gifted to you. You will need to provide a letter to your lender which includes the name of the donor, their relationship to you, the date and amount of the gift and a statement stating that they do not expect to be repaid. Both of you will need to sign the letter and the lender may require additional documents to back it up, such as the donor’s bank statements to prove they have the money or copy of the deposit slip showing when the money was put into your account. The sooner the money is sitting in your account, the better, which will ultimately save problems when it is needed.
The person who lends you the money needs to be aware that the IRS imposes a gift tax on certain monetary gifts. This tax will be paid by the person who gifts you the money, however, in some cases both parties can agree to have the person receiving the gift pay the tax. You may want to reach out to a financial adviser or CPA to find out before you go this route how it will impact your tax liability and any other recommendations they can offer.