Can You Accept Gift Money for the Down Payment on a Home?
Let’s say someone 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.
Lenders need to know that you have the means to pay back your loan. If you have a large gift you want to use for your down payment, you might run into trouble during the underwriting stage of getting your mortgage.
Underwriting is the process that lenders use to verify your income and assets before they give you a loan. It helps a lender make sure they aren’t giving a loan to someone who can’t pay it back.
When you start the underwriting process, your lender will ask you for bank account statements, tax documents and W-2s. These documents prove your income and the assets you have in your bank account.
You may need to provide more than a single month’s worth of bank statements. This is because lenders want to see what kind of money you’ve had in your account for a long time and which assets are new.
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 ask for a gift letter to accompany any large financial gift you use for your down payment. A gift letter 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?
As a general rule, lenders will want you to explain any gift you receive that’s over half the value of your total household monthly income.
For example, if you earn $4,000 a month from your salary, your lender will want you to explain any gifts you receive that are more than $2,000.
A gift letter isn’t always the only evidence needed to prove that the money in your account is legitimate. Your lender might contact your donor and ask them to provide withdrawal and deposit slips to verify the transaction.
These slips tell the lender your relative had the money in their account before they gave it to you and that they haven’t taken out a loan to fund your down payment.
You can take a few steps ahead of time to make sure your gift letter passes your lender’s standards.
Gift Letter and Taxes
You usually aren’t responsible for paying any tax on the money you receive because you’re the person receiving the gift. However, the person who gave you the gift might have to. Let them know about gift tax laws so they can prepare for next tax season.
The annual gift exclusion is $15,000 for 2020, which means your donor doesn’t need to report anything if they give you less than $15,000. They’ll need to file a gift tax return if they give you more than that amount.
A gift tax return discloses to the government the amount they’ve given to you. Filing a gift tax return doesn’t mean the donor automatically has to pay anything. It just deducts the current gift from their lifetime gift tax exclusion, which dictates how much a person can give throughout his or her life.
There’s no limit to the amount of gift money you can use for a down payment. However, whether or not you must contribute some of your income depends on the type of home loan.
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.
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.
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