Coming up with enough money for a down payment is a struggle for many people, particularly first-time homebuyers. Family members and others often want to help. If you’d like to provide money for a down payment as a gift, be sure that you understand the guidelines, required documentation and potential tax implications.
Why Do Lenders Care About Sources of Down Payment Funds?
A mortgage lender will want to know where a borrower got money for a down payment. If someone received a large sum of money from another person, the lender will want to know that the money was a gift, not a personal loan that’ll need to be repaid and that could cause the borrower to be unable to afford the mortgage.
Underwriters will want to know the source of any large deposit in a borrower’s account. Some lenders define a “large deposit” as a single deposit that’s more than 50 percent of the total monthly qualifying income for the loan, while others verify deposits that are more than 1 percent of a home’s adjusted purchase price or appraised value. In some cases, an underwriter will verify the source of any larger-than-usual deposits, no matter how much money the borrower earns or how much the house costs.
Who Can Provide Money for a Down Payment?
All lenders allow gifts from family members, but various lenders have somewhat different definitions of who is considered a family member. Some lenders allow gifts from employers, labor unions, charitable organizations, sellers, builders, developers and real estate agents.
Although the amount that can be given as a gift is not limited, a lender may require a buyer to provide a percentage of the down payment from personal funds. The rules depend on whether the home will be a primary or secondary residence, whether it’s a single- or multi-family house, and the type of mortgage to be obtained.
Documentation and Taxes
If you give someone money as a gift for a down payment, the lender will require a letter including your name, address, phone number, and relationship to the borrower, as well as the amount and date of the gift, the source of the funds, and a statement that the money is a gift and that you don’t expect to be repaid. The letter should also include the address of the property to be purchased and your signature. You should keep detailed records showing exactly where the money originated and how you transferred it to the recipient.
If you give someone a gift for a down payment, you may need to pay taxes on the money. Check with an accountant to find out if you’ll owe taxes and how much.
Be Informed Before Giving a Gift
Giving money for a down payment can help make a loved one’s dream of owning a home a reality. If you want to provide funds as a gift, make sure you understand the lender’s rules and the applicable tax laws.
This article is intended for informational purposes only and should not be construed as professional or legal advice.