Using Gift Funds as a Down Payment

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Using gift funds for a mortgage down payment

So, a family member is ‘gifting’ a down payment on your new home? Lucky you! But before you accept that generous gift, be sure to check with your lender as there are rules and regulations about who can make a down payment gift and how much can be gifted.

Source of Funds
Lenders don’t generally allow you to use a cash gift from just anyone. Typically, the money must come from a parent, grandparent, spouse, or significant other. Banks prefer these sources because they are more verifiable than, say, a stranger off the street.

Your mortgage lender will need to confirm that the money is, indeed a gift and not a loan. Otherwise, you will have an additional financial obligation of repaying the loan which might affect your ability to make future mortgage payments.

Contribution Limits
How much money you’re eligible to receive as a down payment gift will depend on the type of mortgage you applied for. FHA loans, for example, allow the entire down payment to be gifted, while some conventional loans may require a minimum borrower contribution. It’s important to note that down payment gifts may only be used when purchasing a primary residence or second home.

Documentation
Lenders typically require a gift letter signed by the homebuyer and the person making the gift. The letter includes the amount of the gift, the donor’s contact information, their relationship to the recipient, and a statement declaring that the funds are a gift with no expectation of repayment.

Gift Tax Considerations
The IRS imposes a gift tax on the person donating the money, not the recipient. As of 2023, a single person can gift up to $17,000 (or $34,000 if filing jointly), without incurring a gift tax. There are no restrictions as to how many people you can gift each year. It’s always a good idea to consult with a tax professional or financial advisor to discuss your individual circumstances.

Take the Next Step
If you’re ready to explore the possibility of using gift funds for your down payment, we’re here to help! Contact the Julie Payton Mortgage Team for a free consultation.