The average American home costs around $200,000. That means if you are getting a mortgage under the umbrella of Fannie Mae and Freddie Mac, you must put down around 5 to 20 percent of the property’s sale price. That is about $10,000 to $40,000 in down payment that you need to pull out from your savings or your liquid assets.
But not everybody has the money to cover that hefty sum. Most borrowers get stuck for years saving the needed money. Still, there are other borrowers who enlist the help of their family to pay the down payment of a home.
If the latter is your situation, you must know that there are certain conditions for a lender to approve these “gifts” as down payments. Familiarize yourself with these considerations before accepting the gift in your account.
Who Can Gift You?
Your best friend or your successful roommate back in college cannot just give you thousands of dollars to pay for a house. Lenders are pretty strict with who the gift must come from.
As a rule of thumb, you can only receive down payment gifts from a family member, or a close relative such as your aunts and uncles, grandparents, your spouse or fiancé.
However, if you are applying for an FHA mortgage, your down payment gift can be given by your employer, a labor union, a government agency, a nonprofit, or even that successful roommate back in college.
For conventional mortgages, the full 20 percent down payment requirement can be gifted but if you are putting down less than that, a part of the down payment has to come from your own pocket.
If you are taking out a VA or FHA mortgage, all the down payment can come from a gift, unless your FICO score is below 620. In which case, you need to give out at least 3.5 percent of the down payment from your own pocket.
Gift down payments also only work for primary and secondary residences and not for investment properties.
You will be required by your lender to produce a detailed documentation of the gift in the form of a letter that includes:
- the donor’s name and how they are related to you
- date the money was gifted
- amount of the gift
- a statement showing the donor does not expect you to pay the money back
Additional information may be required such as copies of the donor’s bank records that demonstrate he or she is not in a tight financial situation and is therefore fit to gift you money.
Dealing with Taxes
The generosity of your donor could cost some extra sacrifice, namely in the form of a gift tax. A donor can give up to $14,000 worth of gift money without paying for a gift tax but anything beyond comes with a price. If this is too much for you, you can always agree with the donor to cover the tax part from your own pocket.
Certainly, accepting gift money to pay for the down payment of your home is a fast and effective way to get your financing application rolling, saving you years stuck in saving. If you know the rules beforehand and keep your documentations in check, you should not have any issues with gifting.