What Are "Gifts" In Mortgage Lending?
Sometimes we need a little extra help now and again, even when it comes to buying a home. It is legally allowed for direct relatives to “Gift” you money so that you can either have your entire down payment covered, assisted, or even use the funds towards closing costs. There are rules to utilizing this strategy, so let’s go over them.
1) Who Can Provide A Gift?
Gifts are exactly what they sound like, a Gift of money. They shouldn’t be considered a loan on top of the one you are about to receive to purchase property. That being said, there are restriction on who can provide the gift to stave off any chances of this being a loan in disguise. Those allowed to bestow a gift are as follows;
Relatives
Close friend with clearly defined interest in borrower
Charitable organization
Government Agency
Public entity that assists low income/first-time buyers
I’m sure most of you know that relatives can bestow a gift, the lesser known givers can be entities that help first-time buyers and/or government agencies. Those with vested interest in the property are not allowed to be the one presenting the gift.
2) How Much Can Be Gifted?
Most loan programs do not limit the amount that can be gifted. For example, FHA loan programs do not limit the amount that can be gifted as long as the house will be the primary residence for the buyer. Conventional loans also do not limit the amount that can be gifted as long as the house being purchased is the primary residence.
If the house in question is a second home or an investment home, that’s when you will see limitations on the amount that can be received as a gift. A certain percentage of the down payment must be contributed by the buyer at this point.
3) Is The Gift Taxed?
Before we answer this part, I want to disclose that we are not tax professionals and any advice we give on the matter should be reinforced by consulting a tax professional. That being said, our experience has shown that if the gift is given by parents to a child, the amount they can contribute is a combined $30,000 without being taxed. In the situation where a husband and wife are buying a home, the parents of the husband can donate $30,000 as well as the parents of the wife, totaling $60,000 in gifted funds without going over the tax limit. Any amount over this is going to be taxed. If you are receiving a gift from a friend or cousin, that amount is capped at $15,000.
4) Documenting The Gift
Most lenders will require a letter signed by the gift giver detailing the following;
how they know/are related to the borrower
the amount they are going to be gifting
that the borrower in no way required to pay this gift back.
The donor’s contact info and current address
Along with this letter, which can be created by you or us if you so choose, the lender will require that proof of funds be provided to show that the donor does indeed have the capacity to gift the funds stated in the letter. This can be proven by providing bank statements from the account that currently holds the monies that will be gifted.
5) How Is The Gift Transferred?
Typically, the monies to be gifted are wired directly from the donor to the escrow/title company being used in the transaction. If the money being donated has been in the donors account for more than two months, which is normally the case, than the money is said to be “seasoned” and no further documentation showing where that money came from is necessary. However, if the donor recently liquidated some stocks or bonds, pulled money from a retirement account, or is getting the money from somewhere else, the money must sit in the donor’s account for at least two months to be considered seasoned. This is to avoid any cumbersome retrieval of documentation proving that the money came from a legitimate source. The banks are simply trying to ensure that nothing fishy is going on and that large unverified deposits are being made.
If the donor is gifting you, the borrower, directly with money, that same two month seasoning rule applies. If not, than you will be asked to provide proof and documentation regarding the source of the funds.
In Conclusion
Gifts of money are becoming more and more common in today’s economy and with the current generational pool of buyers. We don’t foresee gifts ever going away, so if you’re one of the fortunate to be able to utilize a gift, make sure you know your stuff. Better still, call us today, we at American Freedom Funding would be happy to walk you through the whole process and make it as simple as possible.
If you’d like more info on Gifts, check out this other article we found that we thought was very well written.