The Perfect Holiday Gift--Money for a Down Payment?

We all love to receive money for special occasions or for big life milestones, like purchasing a new home. Gift funds are a great way to help out if loved ones want to take pressure off a new home buyer. However, there are important facts and guidelines to know if you plan to use gift funds for a down payment.

Types of Down Payment Gifts

Cash Down Payment Gift

Down payment gifts are money that someone, usually a family member, gives to a buyer to help them afford their down payment. There are a couple of things that you will need to provide your lender to use the gift, including:

• A written statement (gift letter) documents the transaction. The letter must include the borrower's name; the donor's name; address and phone number; the donor's relationship to the borrower; the property address; the gift amount; a statement that the donor doesn't have an interest in the property sale; and a confirmation that funds do not have to be repaid. Please reference our template.

• Evidence that the transfer of funds has occurred. This could include the donor's withdrawal slip and your deposit slip. It could also be a copy of the check and evidence that it's been deposited into your account. If the donor borrowed the funds, they must be able to document the source.

Gift of Equity

Gifts of equity occur when someone, usually a family member, sells a homebuyer a property for below market value. The amount of equity to be used toward your down payment equals the difference between the price paid and the listed price. Homebuyers must include a gift letter to utilize the gift, just as if someone were providing them with a cash down payment.

It's important to note: Gifts of equity are not allowed on VA and jumbo loans.

Who Can Give a Gift for a Mortgage Down Payment?

FHA loans

These loans offer a lot of flexibility when it comes to the source of the gift. Whereas other programs require familial or marital connection to the buyer, FHA allows funds from other sources, including:

• The borrower's employer or labor union
• Close friends with a clearly defined and documented interest in the borrower
• Charitable organizations
• Government agencies or public entities that have a program providing homeownership assistance to low- and moderate-income families or first-time homebuyers

Conventional Loans

Even if you're pursuing conventional financing, a last-minute holiday check could be used to buy a home, assuming the following guidelines are followed:

• The gift source must be a relative, spouse, or domestic partner
• There are limits on how much the gift can be, but the entire down payment can be a gift if the amount is large enough
• Gift money can be used on a primary residence and second homes

VA and USDA

VA and USDA gift funds must come from a family member. Because they are 100% financing, there is no limit on the amount of the gift.

Pro Tip: In all cases, gift funds will need to be documented. If you know you are going to receive a holiday infusion of cash, doing so by check is the easiest and is often the most convenient way to satisfy the lender.

What are the restrictions?

There's no limit on the amount someone can give you for a mortgage down payment--however, depending on the property type and the loan, you may be required to pay a certain percentage of the down payment from personal funds.

For primary residences:

• For single-family homes, you can use gift funds without having to contribute any personal funds to your down payment
• If it's a multi-family home, you can get a home without contributing to the down payment, as long as it is 20% or more. If the down payment is less than 20% on a multi-unit home, you will have to contribute at least 5% of your personal funds to your down payment

For second homes:

• If your down payment is 20% or more, all funding for it may come from the gift
• If it is less than 20%, 5% of it must come from personal funds

It's important to note: You can't use a down payment gift for an investment property--if you plan to make money off of the property, you have to use personal funds to cover it.

Tax Implications

Generally, gift fund recipients are not responsible for taxes on the funds--for donors, however, rules may be different. Each donor is allowed to gift up to $15,000 per recipient, including adult children, without getting taxed on it. If the gift exceeds this amount, it must be reported on a gift tax return by the person making the gift. The government allows a lifetime tax exemption on gifts up to a certain limit. Gifts funds are added up over time and offset against it.

What If a down payment gift Isn't an option?

While not everyone is fortunate enough to receive a mortgage gift, there are other options available to help if you're facing low down payment funds.

Save more money. You may want to consider extending your timeline for buying a home to give yourself time to accumulate funds. Alternatively, you can search for ways to increase your cash flow, such as taking on a second job or a side hustle.

Consider down payment assistance programs. You may qualify for a grant that provides cash to help cover a down payment. Though the US government itself does not directly offer loans, many first-time homebuyer grants are a result of federal funding. This funding is funneled to individual states, which create different grant programs for homebuyers. Program availability will vary from state-to-state, but in most cases, requirements will be similar.

Consider low or no down payment options. Some loan programs require no down payment for eligible borrowers, such as VA and USDA. FHA and conventional loans are good options if you don't meet eligibility requirements for VA or USDA. Contact one of our Mortgage Advisors to see if you're eligible for a low-down payment option.

Gift funds can put homeownership in reach for plenty of aspiring homeowners. If you have questions or want to learn more about how gift money works, reach out to one of our expert Mortgage Advisors today.