gift money for the down payment

Has a generous relative given you down payment money for a wedding gift or graduation? It’s likely that you’re extremely grateful for the gift money, and that’s completely understandable.

I’ll help you understand how to use the gift money appropriately below. 

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Can You Accept Gift Money for the Down Payment on a Home? 

Let’s say a relative or in some cases an employer gives you money to use as a down payment. As long as you have the money, your lender shouldn’t care about the source – right?

Many homeowners assume that as long as they have a down payment that’s large enough to meet a lender’s standards, they’ll have no trouble getting a loan. Unfortunately, this isn’t always the case.

Large financial gifts create a problem if they’ve been in your account for less than 2 months. If a lender sees a sudden influx of cash, it could trigger some red flags.

The lender needs to know the money that came into your account is a gift, not a loan. Loans hinder your ability to pay back your mortgage and add an additional layer of risk for the lender.

The solution is to have the money in your account for at least two months prior to trying to buy a home, and if you do this the money will become ‘seasoned’ and the underwriters will not ask for proof of where this money came from.

If you cannot wait the two months a gift letter from the family member who is giving the money to you may suffice. This is a statement that ensures your lender the money that came into your account is a gift and not a loan.

The person who gave you the money must write and sign the gift letter as well as provide their personal information. 

How much money do you need to receive before a gift letter is necessary? 

The annual gift exclusion is $16,000 for 2022, which means your donor doesn’t need to report anything if they give you less than $16,000. Parents can give their children up to $32,000 ($16,000 each parent, per child). They’ll need to file a gift tax return if they give you more than that amount.

There’s no limit to the amount of gift money you can use for a down payment, it’s just that there are tax laws regulating this. Keep in mind that tax laws change frequently. Speak with a tax adviser to make sure you have a good understanding of the current laws.  

You may also face limitations as to who can give you gift money, depending on the type of loan you get. Talk to your lender to learn more about their gifting policies.

Gift Money

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