With the holidays quickly approaching, generous relatives and friends may offer financial gifts to help buyers make a down payment on their dream home! As a buyer, it is important to know a few things about using financial contributions from others as part of your down payment. We’ve outlined a few important things to consider below!
Mortgage factors with gift payments
When you buy a home, you’ll likely need to get a mortgage – since very few people can buy a home in all cash. And when a mortgage company lends you money, they generally need to know where the money from your down payment is coming from, so that they can determine how risky it will be to provide you with a loan.
It can be difficult to save for a down payment, and it is common for home buyers to use financial gifts as contributions to their down payment. Although many people use gift funds as part of their down payment, there are some caveats to consider.
In order to show the mortgage company the source of your funds, you will need to have the gift-giver write a letter, This letter should include:
- The gift giver’s name, address and phone number
- The gift giver’s relationship to you
- The dollar amount of the gift payment
- The date that the gift payment was sent
- A statement from the gifter that the money is a gift – not a loan.
- The gift giver’s signature
The mortgage company will want to note that the money is for a gift and not a loan so that they get a clear picture of your total assets before you purchase a home. Depending on the loan product that you get, different gift rules may apply.
Some products may require a percentage of your down payment funds to be your own money. In other cases you may be able to use gift money for your complete down payment. Your credit score could also be a determining factor in whether or not your down payment can be from personal or gift funds.
Ultimately, you should consult a mortgage professional for specific information regarding your down payment.
Tax factors with gift payments
When you accept a transfer of money for a gift payment, there are many cases when that amount could be taxed. For 2018, the maximum gift amount that you can receive untaxed is $15,000. If you receive more than $15,000 from one gift giver for a down payment, the gifted amount may be taxable.
Although, If you and your spouse are purchasing a home together, you can each receive a gifted payment of $15,000 and stay under the tax threshold. You may also be able to get a gift payment of the maximum amount from different people, and remain untaxed. As long as each of you only receives the maximum threshold from the same person, the amount could be taken without taxes.
Relationship factors with gift payments
An additional detail that should be noted with gift payments, is the personal relationship factor. While a gift payment can be very helpful to a first-time homebuyer, it may also put a strain on the relationship between the gift giver and the receiver.
It is important to make sure that it is understood between both parties that a gift payment is not a loan. It is also important to understand that once the money is transferred from the gift giver to the receiver, that it is no longer in the control of the gift donor.
As long as all of these factors are understood and accepted, the gift payment process should be smooth.