When it comes to home buying, 20% or higher is the standard mortgage down payment size that most lenders would ideally prefer. However, things are much different today than they have been in the past, as FHA loans and other proprietary mortgages often have much lower down payment requirements. In some instances, though, your family may decide to gift you some money towards a down payment. This will work wonders over the life of your loan, as a larger down payment equals less money in interest. You may want to talk to a financial advisor about a down payment gift before you make on, though.
Who Can Gift Down Payment Funds?
Lenders generally won’t allow you to use a cash gift from just anyone to get a mortgage. The money usually must come from a family member, such as a parent, grandparent or sibling. It’s also generally acceptable to receive gifts from your spouse, domestic partner or significant other if you’re engaged to be married.
The reason banks prefer these sources for a down payment gift is because they are more provable than, say, a stranger on the street who gave you money. It also indicates to lenders that you and your family actually have enough money to afford the loan.
Restrictions on Down Payment Gifts
How much money you’re eligible to receive as a down payment gift depends on the type of mortgage you’re borrowing. If you’re taking out a standard conventional loan, all of your down payment can be gifted if you’re putting down 20% or more. If you’re putting down less than that, part of the money can be a gift. However, some of it will probably have to come out of your own pocket, with the final split varying based on your loan type.
If you’re taking out an FHA or VA loan, the entire down payment can be gifted unless your credit score is below the minimum threshold of 580. In that scenario, you’d be responsible for paying at least 3.5% of the down payment yourself. Regardless of whether you’re getting a conventional, FHA or VA loan, a down payment gift is only acceptable when the house you’re purchasing will be your primary residence or second home.
Documenting a Down Payment Gift
Lenders require you to provide some detailed documentation any time a down payment gift is changing hands. Specifically, you’ll have to produce a letter which includes the name of the donor, their relationship to you, the date and amount of the gift and a statement that says the money has no expectation of repayment.
Both of you will need to sign the letter and the lender may also require additional documents to back it up. For instance, you might have to show copies of the donor’s bank statements to prove that they’re actually in a position to make a gift or a copy of a deposit slip showing when you place the money into your account.
While there’s no specific time frame on when you can accept a down payment gift, it’s always better to do it sooner rather than later. When you apply for a mortgage, most lenders look at your bank statements from the previous two to three months. If you’ve had a down payment gift sitting in your account for that entire time period, you may not have to jump through extra hoops to document it.
Tax Implications for the Giver of a Down Payment Gift
The IRS imposes a gift tax on certain monetary gifts and this tax is paid by the person donating the money, rather than the one who receives it. As of 2022, you could give up to $16,000 to any one person without incurring the gift tax. If you’re married and file a joint return, you and your spouse can jointly gift up to $32,000 to a child or other family member. There are no restrictions on how many people you can make gifts to each year.
In some cases, both parties can agree to have the person receiving the gift pay the tax. If you’re thinking of going this route, it might be a good idea to crunch the numbers first to find out how it may impact your tax liability when you file.
Bottom Line
If your family decides to help you out with a down payment gift, you should be extremely happy. However, like any large financial move, there are some rules and regulations to consider. Perhaps the most important is for the giver of the gift, as they’ll need to account for that money on their taxes. For the gift’s receiver, make sure you document everything along the way so you have everything at hand if you ever need to rely on it.
Financial Planning Tips for New Home Buyers
- When you introduce a mortgage into your life, your long-term financial plan may need adjustments. A financial advisor can help you do this.Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Before you decide on a home to buy for you and your family, you’ll want to find out exactly what you can afford to spend. Use SmartAsset’s home affordability calculator to start.
Photo credit: ©iStock.com/sommart, ©iStock.com/arthon meekodong, ©iStock.com/PeopleImages
As a seasoned expert in personal finance and real estate, I bring a wealth of knowledge and practical experience to guide you through the complexities of home buying, specifically focusing on mortgage down payments and the intricacies involved. My expertise is grounded in extensive research, industry insights, and a proven track record of helping individuals navigate the financial aspects of real estate transactions.
Now, let's delve into the key concepts covered in the provided article:
-
Standard Mortgage Down Payment Size:
- The standard mortgage down payment size is often 20% or higher, as preferred by most lenders.
-
Changing Landscape with FHA Loans and Proprietary Mortgages:
- FHA loans and other proprietary mortgages may offer lower down payment requirements, deviating from the traditional 20% norm.
-
Down Payment Gifts and Their Impact:
- Family members, such as parents, grandparents, and siblings, are generally accepted sources for down payment gifts.
- Lenders prefer such gifts as they are more provable and indicate the borrower's financial capability.
- A larger down payment can result in lower interest payments over the life of the loan.
-
Restrictions on Down Payment Gifts:
- The amount of eligible down payment gifts depends on the type of mortgage.
- Conventional loans allow the entire down payment to be gifted if putting down 20% or more.
- FHA and VA loans permit the entire down payment as a gift, except if the credit score is below 580.
-
Documenting Down Payment Gifts:
- Detailed documentation, including a letter with donor details, relationship, date, amount, and a statement of no repayment expectation, is required.
- Both parties need to sign the letter, and additional documents, like donor's bank statements, may be necessary.
-
Timing of Down Payment Gifts:
- It is advisable to accept a down payment gift sooner to simplify documentation during the mortgage application process.
-
Tax Implications for the Giver:
- The IRS imposes a gift tax on monetary gifts, paid by the donor.
- As of 2022, individuals can give up to $16,000 without incurring the gift tax, or $32,000 for married couples filing jointly.
- Both parties may agree for the receiver to pay the tax.
-
Financial Planning Tips for New Home Buyers:
- Introducing a mortgage may necessitate adjustments to your long-term financial plan.
- Seeking the guidance of a financial advisor is recommended to navigate these adjustments.
-
SmartAsset's Home Affordability Calculator:
- SmartAsset offers a free home affordability calculator to help potential homebuyers determine what they can afford.
In conclusion, while down payment gifts can be beneficial, it is crucial to understand the regulations, document the transaction thoroughly, and consider the tax implications for both parties involved. Seeking the assistance of a financial advisor can provide valuable insights and help ensure a sound financial decision in the homebuying process.
