Coming up with the money for a down payment can be a headache for potential new home buyers. Depending on the home you want, your lender and the type of mortgage, the down payment can be a hefty sum. Some people use a gift (from parents or others) to help cover the down payment. But even if you do have a financial gift coming, you need to be careful how you use it. Check out these details about financing a down payment with a gift.
Who can gift
In order to use a gift on your down payment, lenders generally prefer the gift to come from a family member. Parents, grandparents and even siblings can usually give a gift to be used on a down payment. Neighbors, friends or third cousins twice removed generally cannot. It’s also important that the money is traceable. Experts say lenders are cautious of cash gifts so it’s a good idea for your donor to gift the money through check or a wire transfer. It is also a good idea for donors to document that they are financially able to make the gift. And if supporting documents are passed on to you along with the gift, it’s a good idea to keep them readily available.
How much you can receive
As of 2015, individuals can make a tax-free gift of up to $14,000. So, a married couple can give $28,000 to their child or $56,000 to their child and son- or daughter-in-law. Any greater amount and the donor will be required to pay gift taxes to the IRS. Depending on the type of mortgage you apply for, there will be different rules for how much of the down payment the gift can cover. For a conventional mortgage, if you put down 20% or more as a down payment, all of it can be from a gift. If you are putting down less than 20%, part must be from your own money. This amount varies from lender to lender. Additionally, you can only use the gift on primary or second homes. For FHA and VA mortgages, gifts can only be used on primary homes.
Using the money
If you want to use gift money toward a down payment, you will have to ask your mortgage lender to provide a letter for you and the donor to sign. The letter must show that the gift is indeed a gift and not a loan to be repaid at a future date. Different lenders will have slightly different rules, so it’s important to check with them on what they require.
Before making any decision on buying a home, it is important to know how much you can afford to pay monthly for your mortgage. Your credit score will play a part in determining this, since it will factor into the interest rate you’re approved for on your loan. (You can check your credit scores for free on Credit.com to see where you stand.) The down payment will be a large portion of home-buying costs and a gift from a family member can make the difference between getting the keys and having to re-sign your rental agreement. Just make sure you and the donor run the numbers and keep everything documented.