What You Need to Know About Using Gift Money or Gift Funds for Down Payment
Gift funds for down payment on home purchase is allowed by both FHA and Fannie Mae and Freddie Mac, however, there are rules and regulations with regards to gift funds and each loan program has their own lending guidelines on gift funds.
Many families help each other out, especially in Hawaii. Gifting money also helps with estate tax later.
A parent may give their children gift funds to purchase a home. A grand parent may give their grandchild gift funds to be used towards the down payment of their home purchase. A couple may get gift funds as their wedding gift from family or close relatives where they can use that as a down payment for their home purchase.
Why Are Lenders So Uptight About Gift Funds?
Mortgage lenders want to make sure that the gift funds are actual gifts and not loans. If an applicant were to borrow part of the funds required to complete the transaction, that monthly expense would need to be accounted for in their debt-to-income ratio. Mortgage lenders want you successful in making your mortgage payments.
Gift funds do not need to be repaid, so there is no additional burden on the borrower. And it is the only type of financial assistance that doesn’t change the borrower’s capacity to borrow, it has historically been one of the most abused and cheated aspects in lending.
To combat such fraud, underwriting guidelines have been put in place to ensure that the gift fund is in deed a real gift!
Before you accept gift funds for down payment on a home purchase, check with your loan officer for instructions.
You loan officer will tell you that gift funds for down payment needs to be sourced. The donor of gift funds for down payment on your home purchase needs to complete a gift letter which states that the gift funds is not a loan and that the gift funds does not need to be paid back.
The donor of the gift funds needs to provide 30 days of the donor’s bank statement showing that the gift funds was seasoned in the donor’s bank account for at least 30 days. The gift funds leaving the donor’s account needs to be reflected in the bank statement of the donor.
The recipient of the gift funds needs to provide the copy of the check, the deposit slip, and a new bank transactional history print out that is signed, dated, and stamped by the bank teller reflecting the funds in the bank account of the recipient.
The Gift Letter must contain the following information:
The donor’s name, address and phone number
The donor’s relations to the homebuyer/recipient
The dollar amount of the gift for down payment
The date that the gift fund is transferred to the homebuyer
A written statement from the gift donor’s stating that the fund is a gift and NOT a loan that needs to be repaid.
The gift fund donor’s signature
The address of the property to be purchased.
Gift funds can only be given by a close family member.
The person giving the gift will need to:
§ Sign a Gift Letter that includes their complete contact information and amount of the gift.
§ Provide a copy of the check or financial instrument used to transfer the gift.
§ Provide proof that they themselves had the ability to give the gift (the money was in their account).
The gift recipient will need to provide proof those transferred funds were deposited in an account they hold.
How Much of the Down Payment Can be from a Gift?
That depends on the type of home loans.
For conventional home loans, if you putting 20% down payment or more, then the whole amount can be gifted.
However, if you’re putting less than 20% down, only part of the down payment can be from a gift fund, and the rest has to be from your own fund.
Gift funds for down payment is only allowed on owner-occupied primary and second residences. Gift funds are not allowed for investment property purchase.
What About FHA Loans and VA Loans?
Both FHA loans and VA loans allow 100% gift funds for down payment for home purchase. Both loans are for owner-occupant only.
If you are purchasing an investment property, gift funds cannot be used at all, period.
It is VERY important to note that if gift funds are provided early enough in the process, and those funds have remained in the borrowers own accounts for more than 60 days, no gift funds supporting documentation is required.
Gifts are not restricted to only money. Gifts can also be in the form of equity in a property. If parents wish to have their child purchase a property from them, the parents can gift a portion of the equity to be used as the child’s down payment.
What Else Do You Need to Know About Gift Money…
Gift Tax, sometimes confused with Inheritance or Estate Tax, is a tax on the transfer of cash, asset, property from one person to another while receiving nothing in return, in another word, as a gift.
In most states, the tax applies whether the donor intends the transfer to be a gift or not.
The Gift Tax and Estate Tax are closely related. The IRS allows you to give up to $14,000 per year to any number of people without incurring any gift taxes.
If the gift exceeds $14,000 in a given year, the person who makes the gift, not the recipient, has to file a gift tax return and pay any tax owed. However, there is $5,430,000 lifetime exemption before you have to pay gift tax.
Any gift that exceeds the annual exemption of $14,000 reduces your estate tax lifetime exemption of $5,430,000. For example, you give your son $114,000 in 2015. $14,000 is exempted while you have to file a gift tax return and report that you used $100,000 of your $5,430,000 lifetime exemption.
Here’s the good news…
There is NO gift tax in Hawaii. All Gift Tax are exempt in the State of Hawaii.
If the total estate asset (property, cash, etc.) is over $5,430,000, then it is subject to the Federal Estate Tax.