Whether it’s your nana, who has been coming through with a crisp $20 bill every birthday for years, or your unassuming father-in-law, if you are fortunate to be on the receiving end of help with a down payment, what’s your next move? After the expressions of heartfelt gratitude, it will require some strategy on your part.
It’s a good problem to have: family members or close friends who want to contribute to your down payment. However, under the current banking regulations, how, when, and from whom you accept gifted funds to put toward the down payment on a home matters.
Here’s what you need to know:
No strings attached. Lenders need to be certain the cash is a gift and not a loan. The reason is that a loan would have to be added into the debt calculations the lender uses to ensure you can afford to repay the mortgage.
So, in addition to the “Thank You” note you send your benefactor, you’ll also need to have them sign a “gift letter” that certifies the money you are receiving is in fact a gift. Your lender will provide the format, which will include the following information:
Create a Paper Trail. Despite the convenience of online and mobile banking apps, you may still want to go old school to create a paper trail for the gift. This makes it easier for a lender to trace the gift.
You should request that a check be written. The amount of the check needs to match the amount mentioned in the gift letter down to the penny.
Make a copy of the check for both your benefactor and yourself. The lender will need to see this.
Take the check to the bank and deposit it in person, via a teller, to the account that you will be using to withdraw the money for your down payment. It’s best not to bring money to the closing that is drawn from different banks, which can confuse things. Also, only make the one deposit during the visit to keep the trail clear of confusion by having a deposit receipt that matches the amount mentioned in the gift letter.
- Your benefactor will also be asked for proof of where the money came.
Family Only. When you receive gifts from family, it’s straightforward. Gifts from nonrelatives require documentation of the length and nature of the relationship. The lender will then decide if the money can be used or not.
Check Your Program. Although most mortgage programs allow for gifted funds, verify with your Loan Officer just to be safe.
There are limits as to how much can be gifted by one person to another without incurring tax consequences. Both you and your benefactor should check with your respective tax professionals to determine what the best strategy for each your situations would be before exchanging any funds.