Using Down Payment Gifts for Buying Your House
Buying a house is a big decision especially if it’s your first time in the real estate market. In most cases, buyers need to offer a down payment during the process. Usually, the standard amount preferred by money lenders is 20% of the total amount, and even though it may not seem like a huge amount at first, it’s not always easy to find enough money for it. This is where cash payment gifts come in handy. Though they can be a big help, they may also exponentially complicate matters. So, before you accept cash as a down payment gift, there are some guidelines and rules that have to be followed.
Rules for Down Payment Gift:
The first rule is this: every cash payment gift must be accompanied by a formal letter stating that the amount is a ‘gift’. The second rule is that a legitimate paper trail must be submitted to trace the process of the gifted cash from the sender to the receiver’s (in this case, the home buyer) account. Most importantly, the cash gift cannot be a loan-in-disguise and must come from a family member or any blood relative, that is, a parent, a sibling, a spouse, a grandparent, etc. Usually, home buyers can accept up to 6% of the total cost of the prospective house in the form of a cash down payment gift.
Restrictions on Down Payment Gift:
The amount of money that one is eligible to receive as a cash gift for down payment depends on what kind of mortgage they are borrowing. If it is a conventional loan backed by institutions such as The Federal Home Loan Mortgage Corporation (Freddie Mac) or The Federal National Mortgage Association (Fannie Mae), then the total down payment can be gifted if it amounts to 20% or more. If the amount being invested is lesser than that, part of the amount can be a gift but the rest must come out of the home buyer’s pocket. Now if someone were to take out a VA or an FHA loan, the full down payment can be a gift unless their credit score is below 620 which is the minimum threshold; if such were the case, they would have to pay at least 3.5% of the down payment amount themselves. Please remember that whether you’re taking a convention loan or an FHA/VA loan, the down payment cash gift can be acceptable only when the house being purchased is one’s primary or secondary residence.
Money lenders or legitimate loan sharks should be provided with detailed documentation whenever the down payment cash gift changes hands. An official letter including the name of the donor, their relationship to the receiver, the date when the gift was given, and the amount must all be prepared and provided. Additionally, a statement saying that the money was given without any expectation of being repaid must be written. Both parties will have to sign the letter and if required, the home buyer might also need to show additional documents, such as a copy of the donor’s bank account statement to prove that they are capable of making such a monetary gift. They could also be asked to provide a copy of the deposit slip.
Any Time Limits?
While there is no fixed timeframe on when one can accept a down payment cash gift, it is always better to make the transaction as soon as possible rather than to wait and delay for later. When a prospective buyer applies for a mortgage or loan, money lenders will look at their bank statements dating back to at least two or three months. So, if your account statement shows a cash deposit given as a down payment gift, the process of securing a loan will go much smoother without the need for extra documents.
The IRS imposed a gift tax on several types of cash gifts which must be paid by the person who is donating the amount, and not the one who is receiving it. According to 2015 reports, a person can gift up to $14,000 to anyone without having to pay the gift tax. If you’re married and have filed for a joint return, both spouses can jointly gift an amount of up to $28,000 tax-free. There is also no restriction on the number of people one can make down payment gifts to in a year.
So if one follows these simple guidelines, they can quite easily purchase their dream house, all thanks to some generous down payment cash gifts from family or relatives.
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