Having recently had a closing that almost didn't happen due to method of depositing "GIFT" money to use for down payment/cash at closing, this article couldn't be more timely!
Downpayment gifts are common among today's home buyers (i find them to be increasing in popularity). It may surprise you, though, to hear that buyers of all types are taking gifts for downpayment. It's not just first-time home buyers.
Move-up buyers and even buyers of jumbo homes seem to be bringing cash gifts to closing more frequently than in the past.
If you're getting a gift of downpayment from a family member or spouse, make sure you do it the right way. If you do it wrong, your bank may turn down your loan in underwriting.
"Downpayment Gifts" Rise Sharply
Since 2006, mortgage lenders have been tightening their downpayment requirements. High default rates have led to big losses so banks want to see more of buyer's own money into the purchase.
This is not to say that low downpayment mortgages aren't available. They are. There are a number of high-profile loan programs for which downpayment requirements are small :
FHA Purchase : Minimum 3.5% downpayment
Veteran's Administration (VA) Purchase : 0% downpayment
Fannie Mae HomePath : 3% downpayment
Despite a bevy of low-downpayment (and no downpayment) mortgage choices, most home buyers rely on standard Fannie Mae / Freddie Mac conventional loans.
A conventional loan is characterized by loan size and downpayment. Loan sizes are typically $417,000 or less except in high-cost areas such as Palo Alto, California and Fairfax, Virginia; and downpayments are typically 10% or higher.
Conventional mortgages are the most popular among today's mortgage choices because they often provide the best combination of low mortgage rates and low closing costs. Plus, for loans with less than 20% down, conventional mortgages typically provide cheaper options for mortgage insurance.
These are all reasons why mortgage gifts are more common today.
If accepting a downpayment gift is part of your home financing strategy, though, it's important to recognize that there's a right way and a wrong way to do accept a cash gift for downpayment. You can't just deposit your parents' money into a bank account, for example.
There is a set of rules to follow, and you must follow them to the letter.
Download Your Certified "Downpayment Gift Letter"
When you accept a cash gift for a downpayment on a home, there's a 3-step process to follow. No matter to where your loan is ultimately headed -- Fannie Mae, Freddie Mac, FHA, VA, or the USDA -- the process is the same.
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 until Step 2 is complete.
Now, if writing letters is not your thing and you want to a pre-written, fill-in-the-blanks gift letter for your purchase, use my online rate quote form and I will send you the same gift letter that I use for my own clients upon request.
Follow The Mortgage Downpayment Gift Guidelines
Now that you have your mortgage downpayment gift letter written, you'll want to make sure you don't violate the rules of "taking a gift". The key is for the gifter to keep an extra-strong paper trail for the money being gifted.
This means that if you're the one giving the gift to the home buyer, and you sell stocks as part of the downpayment gifting process, you'll want to make sure that you document your stock sale as well as the transfer of funds from your brokerage account into the account from which you're gifting funds to the home buyer.
Next, write a check for the exact amount specified in the gift letter -- no more and no less. Photocopy the check. Keep one copy for your records and give one copy to the giftee -- the lender will want to see it.
Do not wire funds, if possible. It's simpler to document and track a check -- all you need is a teller receipt.
If you are the home buyer and you are receiving the downpayment gift for your home purchase, there are steps that you are going to want to follow, too.
First, with your gift check in hand, physically walk into your preferred depository bank (i.e. Wells Fargo, Bank of America, Chase). Whichever bank you choose, select the bank account from which all of your downpayment funds will be drawn. Do not make your downpayment fund using monies from multiple bank accounts and multiple banks.
Pick one bank, and one bank account at said bank. Then, do the following :
Deposit the downpayment gift as a single deposit.
End your transaction.
Collect a receipt for your deposit.
Under no circumstances should you "co-mingle" the gift deposit. If the gift is for 10% down on the home, the deposit receipt should be for 10% of the home's purchase price. It should also match the exact amount specified on your certified downpayment gift letter.
If the deposit amount fails to match the gift amount specified in the gift letter; or the amount shown on the gifter's teller receipt; or the amount shown on the photocopy of the gift check, your lender will likely disqualify your use of "gift funds" entirely.
Tax Notes On Home Downpayment Gifts
As a giver of cash gifts for downpayment, or the recipient of a cash gift for downpayment, you may be subject to certain tax or legal liabilities. Your lender will not report your gift to the IRS; it's not the lenders responsibility to report gifts of downpayments. It's yours.
Your lender will use your gift letter(s) and gift status for underwriting only; to make sure the mortgage meets underwriting standards.
If you have questions about how donating a cash downpayment gift to a home buyer will impact your tax liability, or if you'd like to know whether receiving a cash downpayment gift is something to report to the IRS, talk with your accountant.
About the Author
Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage. Email Dan at dan.green@waterstonemortgage.com or call 513-443-2020.
Mark Slade
Keller Williams
917-797-5059
Email: marksladehomes@aol.com
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