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Saving for a down payment is one of the biggest hurdles people face when trying to buy a house. Fortunately, it is possible to get a little help with this process in the form of a down payment gift from a family member, close friend, or charitable organization.
That said, whether you’re giving the gift or receiving it, you should know that there’s more to down payment gifts than just handing someone a wad of cash. In fact, these transfers are closely regulated by lenders.
With that in mind, I’ve laid out the most common stipulations below. Keep reading to learn what you need to know about contributing funds to a real estate transaction.
Who can give a down payment gift?
Believe it or not, there are restrictions on who can give money towards the purchase of a house. This is because, unless the person giving the money is particularly close to the recipient, lending money usually comes with strings attached.
Lenders want to ensure that the gift money given is just that – a gift. They don’t want there to be any other financial arrangements (like a loan) that can alter your debt-to-income ratio and make it harder for you to get a mortgage.
To that end, only certain people are allowed to give down payment gifts. For conventional loans, they are as follows:
- Immediate family members: Parents, grandparents, siblings and spouses
- Soon-to-be family members: Domestic partners, engaged couples, and future in-laws
Notably, FHA has its own set of rules on this and they’re a little more lenient. In this case you can receive money from:
- Family members
- Friends (with a documented interest in the borrower)
- Employers
- Charitable organizations
As for who’s not allowed to give a gift, you’re prohibited to receive money from anyone with a vested interest in the sale of the house, meaning:
- The seller
- Either real estate agent
- The builder
How much money can you receive as a gift?
Where FHA loans are concerned, the entire down payment can come in the form of a gift.
For conventional loans, if you’re putting down 20% or more, all of the funds can come from a gift. However, if you’re putting down less than 20%, some of that money will need to come from your own pocket. The exact amount you’ll be expected to pay will be determined by the company from which you’re buying your private mortgage insurance (PMI).
Also of note, in order to be eligible to receive gift money, you need to be buying either a primary residence or a second home. At this time, you cannot receive this type of assistance when buying an investment property.
Documenting the gift with a letter
Ultimately, no matter who gives the gift or how much is given, the gift needs to be documented. This is done by writing a gift letter that contains the following information:
- Borrower’s name
- Donor’s name, address and phone number
- Donor’s relationship to the borrower
- Property address
- Gift amount
- A statement that the borrower isn’t expected to pay back the gift
- A statement that the donor has no interest in the sale of the property
- Both of your signatures
In addition, the lender needs to see a paper trail, proving that the money has been transferred from the donor’s bank account to either the borrower’s account or an escrow account. This could be statements from both of your banks, a cashier’s check, or wiring information.
Tax implications of giving gift money
The borrower – or the person receiving the money – doesn’t have to report the gift to the IRS or pay gift or income tax on its value. If you’re the person who’s donating the money, however, the rules are a bit different.
Any one person can give a gift of $15,000 without getting taxed on it. Beyond that amount, the gift must be reported on a gift tax return. But, you likely still won’t have to pay tax on it.
Any gifts that you report on a tax return get tallied up and offset against a lifetime exclusion on gifts. The exclusion amount is currently 11.4 million.
A tax return gets filed in order to track your lifetime gift amount, which will be used in calculating tax on your estate when you pass. Beyond that 11.4 million figure, the gift tax will be enacted, which can be anywhere from 18% to 40%.