Downpayment Assistance : How To Give And Receive A Cash Downpayment Gift For A Home
Receiving a cash downpayment gift on the purchase of your next home? You're not alone.
The tight U.S. economy plus a proliferation of first-time buyers has anecdotally increased the number of mortgage applicants using cash gifts from family and friends for purposes of a home downpayment.
If you're among today's home buyers using a cash gift for downpayment, though, you'll want to make sure that you "accept your gift" properly. Do it improperly and your lender is likely to reject your loan in underwriting.
Be sure to follow the rules of cash gifting.
"Downpayment Gifts" In Demand Among Home Buyers
There are several reasons why cash downpayment gifts are more common this year as compared to several years ago. First-time buyers may have less money in savings, for example, and move-up buyers may have less home equity to carry forward after last decade's housing downturn.
In addition, U.S. tax laws have changed the gifting landscape.
However, among the largest drivers for today's gifts of equity is the want of U.S. home buyers to make a 20% downpayment. With a 20% downpayment, home buyers often find themselves eligible for the best mortgage rates available from their bank; and with 20% down, there is no accompanying private mortgage insurance (PMI) charge.
With 20% down, a buyer can look at "conventional" mortgage financing, which means that the loan is backed by Fannie Mae or Freddie Mac.
Conventional loans are typically limited to $417,000 except in designated "high-cost areas". High-cost areas are determined by the government and include such places as San Francisco and Los Angeles, California, as well as their surrounding suburbs; Washington, D.C. and all of Montgomery, Fairfax and Loudoun Counties; and New York City, among others.
In high-cost areas, conventional loans are permitted up to $625,500 for single-family homes. Multi-unit homes (i.e. 2-unit, 3-unit, 4-unit) allow for larger loan sizes than $625,500.
Note that in 2014 mortgage loan limits will be different.
Not everyone wants make a 20% downpayment, however. That's okay. Cash gifts are also allowed for certain low-downpayment mortgages including the FHA purchase mortgage, which requires a 3.5% downpayment; and the Fannie Mae Conventional 97 program which requires just 3% down.
Furthermore, some buyers don't need a downpayment at all.
Veterans of the U.S. military and home buyers in less-dense cities can be eligible for 100% financing via the VA mortgage and the USDA mortgage, respectively.
Step 1 : Download Your "Downpayment Gift Letter"
When you accept a downpayment gift, remember that there's a right way and a wrong way to do it. You cannot randomly deposit gift funds into a bank account, for example. That will get your loan denied.
There's a 3-step process when accepting a cash downpayment gift and no matter what your loan type -- Conventional, FHA, VA, or other -- the 3-step process is the same. Follow the rules to the letter.
First, write a gift letter that follows the includes the following information :
- The amount of the gift
- The subject property address
- The relationship of the gifter to the giftee
- A note that the gift is actually a gift and not a loan
The gift letter should be as long as needed and should not contain "extra" information. Have all parties sign and date the letter. Set the letter aside -- you'll come back to it in the section below.
Step 2 : What The Giver Of The Gift Needs To Do
With your mortgage downpayment gift letter written, you'll want to make sure you don't violate the rules of "taking a gift". In order to do that, make sure to keep an extra-strong paper trail for the money being gifted.
If you are the person who is gifting funds to the buyer, for example, and you sell personal stock holding as part of the downpayment gift process, you will want to make sure that you document the sale of your stock as well as the transfer of funds from your brokerage account into the account from which you're making the gift.
Do not make the transfer without a proper paper trail.
Next, you'll want to write a check to the home buyer for the exact dollar amount specified in the gift letter you've written. Photocopy the check. Keep one copy for your records and give one copy to the buyer -- the lender will want to see it as part of the process.
Note that writing a check is more effort than wiring funds between your account and the buyer's account. Be okay with that. It's simpler for a lender to document and track a personal check and it's good to make things simple for the bank.
Step 3 : What The Receiver Of The Gift Needs To Do
Now that the gifter has handed, in the form of a check, a downpayment gift to the buyer, the following steps are required.
First, with the gift check in hand, the buyer should physically walk into a preferred depository bank (e.g.; Wells Fargo, Bank of America, Chase, Fifth Third) to make the deposit in-person. Do not deposit the check online using an iPhone or Android app, for example.
In addition, whichever bank into which you choose to deposit your gift money, make sure it's the bank account from which all of your money at closing will be drawn. You do not want to bring money to your closing from multiple savings accounts. This, too, can make things difficult on a bank and the goal is to keep things simple.
With your bank selected, then, do the following :
- Deposit the gift funds into a bank account
- End your transaction
- Collect a receipt for your deposit
Under no circumstances should you "co-mingle" the gift deposit with other funds, or other gifts. The amount specified on your teller receipt should match exactly the dollar amount on the certified downpayment gift letter. If the amount is off by even a penny, the lender will likely reject your letter and the funds that came with it.
Note that if you are receiving multiple cash gifts for downpayment, you should follow this process for each gift independently. Again, do not co-mingle your gifts. Be guided by your gift letter.
Tax Notes On Cash Downpayment Gifts
It should be noted that there may be tax implications for givers of a cash gifts for downpayment, and receivers of them. These are items for your account.
Your lender will not report these cash gifts to the IRS; it's not the lenders responsibility to report such things. Your lender will use your gift letter(s) for underwriting only, ensuring that the mortgage meets its underwriting standards.