Down payment gifts are excellent help when you plan to buy a house, but there are crucial points to remember about using such funds. Down payment gifts are typically donations from your family, friends, or employer. They can also come from government and non-profit entities that offer down payment gifts to qualified people, too.
1. Who Can Donate Down Payment Gifts to You?
Although nearly anyone can give you a down payment gift, some lenders won’t allow them from certain sources. This can be for a variety reasons, but the loans listed below are flexible about common gift receiving methods.
Fanny Mae or Freddie Mac
You can only use down payment gifts from family members when you’re getting a loan from either of these government lenders. This includes immediate family members, as well as your cousins, aunts, uncles, nephews, and nieces. Other eligible people are in-laws, foster family members, step family and even fiancés.
Federal Housing Administration Mortgage Loans
FHA also allows down payment gifts from immediate family members, but cousins, nephews, and nieces are not eligible. They also allow assistance from close friends, employers, labor unions, non-profit groups and government offices.
VA and USDA Mortgage Loans
You’ll deal with fewer down payment gift rules when getting a loan from VA or USDA lenders. However, they specify not to receive gift cash from entities that have an interest in the property sale. Think of the property seller, builder, developer, or real estate agent.
2. Verifying the Down Payment Gifts
Mortgage lenders will verify that your down payment chunk of cash has come from an eligible source. This happens during the underwriting process.
Underwriting is when the lender inspects your financial capabilities to pay the mortgage loan. They do this to assess the risks when letting you borrow for a home loan. Quite higher risks mean higher interest or shorter mortgage terms. If the risk appears too great, they might also reject your mortgage application.
Now, the underwriter will check your bank account to make sure that you have enough cash for the down payment. They’ll then weigh the deposit with your financial history.
The underwriters may question when the deposited cash amount is more than 1% of the value of the property, or if it’s higher than half of your monthly earnings. They also won’t like if the money is a loan. Why? Because that affects your credit score. A separate large loan may also give you difficulties when paying the mortgage.
In order to be honest about the gift and provide proof of the source, that’s when a gifting letter becomes necessary.
3. Understanding Gifting Letters
A gifting letter is a document from the donor of a down payment gift and should carry essential information that includes the name, address, and contact details of the donor, as well as their relationship to you. It should also indicate the amount that the donor has given, the date of the cash transfer, and the address of the property you are going to buy.
Moreover, the giver must also state that you don’t need to pay back the amount after you buy the house.
Those details are important to clarify the money is a gift and not a loan to pay a loan. However, the lender may still ask for supporting documents, such as receipt of the money transfer. Also, remember that a gifting letter won’t justify donations from ineligible givers. Thus, it’s important to ask the lender for their list of eligible sources of down payment gifts.
4. How Much Cash can be Gifted?
Eligible givers can give as much cash as they want, but you should think about the tax that comes with huge donation, as well as your own contribution that some mortgages require.
Tax Regulations about Down Payment Gifts
The law says that any one person can gift up to $15,000 in a year without being taxed. Married couples can give up to $30,000 a year. Talk with your donors about this to avoid any misunderstandings.
Personal Down Payment Contribution
Now, some mortgage loans require you to pay a certain part of the down payment, which means you cannot completely cover it with gifted cash. This is to ensure you are not taking on a financial responsibility to can’t afford.
For example, if you get an FHA mortgage loan and you have at least a 580 credit score, then you must contribute at least 3.8% of the down payment. If you have a lower credit score, then you must cover at least 10%.
Note, however, that the rules about such contributions often change. Ask your lender for clarification about the most recent requirements.
5. All about Seasoned Down Payment Gift Cash
Remember that lenders and their underwriters only check a few months of your financial records. If they’ve seen a certain amount that’s been sitting in your bank account for quite some time, chances are, they’d give you fewer worries about verifying it. They won’t even ask for gift letters in some instances.
That is what you call seasoned gift cash. These are cash donations that have stayed in your bank account for at least two months or more. Meaning it is wise to ask for down payment gifts from potential donors a few months before you apply for a mortgage and buy a property.
6. Other Gift Cash Restrictions
The type of property you’re buying also determines whether or not you can use gift cash.
Generally, you can’t use down payment gifts when buying an investment property like you can for a residential one. Buying a second home also restricts gifted money. Again, be sure to clarify these points with your lender.
7. How to Acquire Down Payment Gifts
Yes, you can expect some relatives and friends to give you some financial help when buying a home. But if that is not an option, reaching out to a non-profit organization is an excellent option. You can also find some state or federal housing programs that provide assistance as well.
Remember These Points when You Buy a Home with Gift Cash as a Down Payment
Down payment gifts are helpful for home buyers who don’t have enough cash for the transaction closing or receive it for other reasons. However, remember that gifted cash has use requirements and may be taxed. Always check with your lender about the latest requirements.