Understanding Down Payment Gifts

Are you receiving a cash gift for a down payment on a home? Lucky you! But you need to be aware of how to receive that gift in the proper way. Otherwise, it could jeopardize your loan application.

Cash gifts used as down payments are common among first-time homebuyers, especially those looking to make a 20 percent down payment overall. This amount usually gives buyers access to the lowest rates offered by their lender, and eliminates the need for Private Mortgage Insurance, or PMI.

Documenting a cash gift is extremely important, and there are steps to follow to do so properly. A down payment gift letter is one of them. The letter needs to include the following information:

  • The gift amount
  • The location of the property to be purchased
  • The relationship between the gift provider and the gift receiver
  • A statement that indicates the gift is actually a gift and not a loan and doesn’t have to be repaid

Note that both the giver and receiver should sign and date the letter.

In addition, more documentation is necessary to avoid violating any rules. The gift giver needs to create a paper trail that shows where the money to be given is coming from (savings account, stocks that were sold, etc.). Also, if writing a check, the amount should match exactly what’s stated in the gift letter. Make a copy of the check and give a copy to the buyer, who will need to forward it to the lender as part of the lending documentation process.

The person receiving the check then needs to deposit it in person at the bank and in an account where all the closing costs will be withdrawn. The check should not be deposited using remote deposit or through an ATM. And the funds deposited should be kept separate from any other funds. A receipt should be obtained showing the exact amount deposited.

If receiving multiple gifts, the same documentation process should be used for each gift. And the gifts should not be co-mingled.

Generally speaking, gifts are only allowed from family members (parents, grandparents, siblings, spouse or partner, etc.).

Keep in mind that there likely will be tax implications involving a down payment gift, both for the giver and receiver. And there may be other rules and restrictions to be followed, so check with your lender to ensure you’re going about things the right way.

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