Know Your Cash Gift Rules And Protocols
As the gift-giving season winds down, we think it’s a perfect time to share some information on a gift that isn’t usually wrapped in festive paper or tied with a pretty ribbon – cash gifts for a down payment on a new home.
Many first-time and even repeat homebuyers use financial gifts to help pay for a down payment on their new home. But to ensure the funds are acceptable to your lender, gift givers and receivers must follow the strict rules and protocols for giving, receiving and using financial gifts for a down payment.
Giving A Cash Gift For A Down Payment
Financial gifts for down payments are widely acceptable when they come from family (parents, grandparents, siblings, spouses, children). Some mortgage programs, like FHA, do allow for individuals outside of family to gift cash for a down payment, such as an employer, government agency or a close family-friend. Gifts from non-family members will require proof of a long-standing relationship.
Current financial gifting limits allow for an individual to gift up to $14,000 to any one person without incurring a gift tax. If married, each individual may gift separately up to $14,000, to the same person, totaling $28,000. If a married couple is gifting to anther married couple, each individual may separately gift up to $14,000 to each of the other two individuals, essentially totaling $56,000.
Giving the cash gifts must be done in a particular manner. If you’re gifting money for a down payment, you can’t just hand someone a box of cash or make a bank transfer without careful tracking and authorization.
First, you must provide a signed Down Payment Gift Letter, stating that the money is intended for the sole purpose of purchasing a home and is not a loan. PrimeLending recommends that you and the homebuyer work directly with your lender to draft an appropriate letter that includes all of the required information.
With the Down Payment Gift Letter finalized and signed, you will write a check for the dollar amount stated in the gift letter. Writing checks may seem archaic, but it’s the preferred method for lenders, and it’s easier to track than a wire transfer.
Receiving A Cash Gift For A Down Payment
If you’re the lucky receiver of a financial gift for your down payment, you can’t just deposit your check using an ATM machine. You have to physically walk into your bank to make the deposit in person. Make sure you’re using the same bank that you will use for withdrawing all of your money required at closing.
Be mindful not to deposit your gift check along with other gift checks (using multiple cash gifts for a down payment is acceptable), miscellaneous checks or cash. You need to keep each deposit transaction separate and collect a receipt for each deposit.
With the gift secure in your bank account and with copies of all of your required documentation, you will work directly with your lender to appropriately transfer they money to the escrow company handling your home-buying transaction.
An Alternative for Gift Givers and Receivers
An alternative to the above, available in some states, is to have the person giving the gift wire the funds directly to the title company prior to closing. This eliminates several documentation steps in the overall process, although a gift letter is still required. Work with your mortgage expert to ensure this is acceptable for your loan and in your location, and to ensure the proper steps are completed.
Using A Cash Gift For A Down Payment
Cash gifts are acceptable for many loan programs, including conventional loans, jumbo loans, FHA loans, VA loans and USDA loans. How much money you’re eligible to receive and the requirements for using cash gifts for down payments vary with each type of loan.
For example, when using a conventional loan you can use a cash gift for the entire down payment as long you’re putting down 20% or more. If you’re putting down less than 20% on a conventional loan, then you may use only some of the cash gift while paying part of it out of your own pocket.
For FHA or VA loans, you can use a cash gift for your entire down payment, unless your credit score is on the lower side. With a lower credit score, you may be responsible for paying at least 3.5% of the loan amount payment yourself. Talk with your mortgage lender to find out details and determine which loan program best fits your home-buying circumstances.
PrimeLending understands that buying a home does not come with a one-size-fits-all formula. That’s why we specialize in pairing homebuyers of all demographics and socioeconomic backgrounds with a mortgage program that makes sense for them. If you’re ready to purchase a home using a financial gift as a down payment, contact a PrimeLending loan specialist to learn about your options and requirements. We’ll walk you through every step of the financial gift giving and receiving process!
*PrimeLending is not authorized to give tax advice. Please consult your tax professional for tax advice for your specific situation.
from the PrimeLending blog, by Mandy Jordan