Gift Money for Down Payments: Lender Requirements and Tax Concerns

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Gift funds can be a great source of down payment money on your new home, helping bridge the gap between your savings and the amount needed to afford the home. However, gift money can lead to complications that might threaten to derail your mortgage application if you're not careful. This article examines the rules and limitations that apply to gift funds for home purchases.

What Counts as Gift Money for Down Payments?

As specified by most mortgage lenders, gift funds for down payments must have a verifiable source, cannot be loaned and must be accompanied by a formal gift letter for your application. When you apply for a loan, lenders will request an explanation of any unusually large deposits into your bank accounts. In order for such funds to be considered a gift, you must prove that it came without any express or implied expectation of repayment.

The question of whether an outside contribution qualifies as a gift or a loan is important in determining your debt-to-income ratio (DTI). DTI is an important factor in your lender's underwriting criteria. For example, personal loans qualify as debt and the repayment requirements will increase your debt-to-income ratio, potentially resulting in a denial of your mortgage application. By comparison, a true gift isn't considered debt and thus has no impact on your debt-to-income ratio.

Who Can Gift Money for Mortgage Down Payments?

In order to ensure that a gift is not in fact a disguised loan, lenders put multiple restrictions on the field of eligible donors. Acceptable sources for a gift fall into two broad groups. The first consists of parties that are personally connected to the borrower, like relatives or friends who can materially prove their relationship. The second includes non-profits or government organizations whose mission is to provide financial support to homeowners.

Eligible Gift Sources for a Mortgage Down Payment

  • Relative
  • Employer or labor union
  • Close friend with clearly defined and documented interest in borrower
  • Charitable organization
  • Government agency
  • Public entity that assists low-income/first-time homebuyers

For the purposes of gift funds, a relative is defined as the borrower's spouse, child or other dependent, fiancé or domestic partner, or any other individual who is related to the borrower by blood, marriage, adoption or legal guardianship. The gift donor may not be a person or entity with an interest in the sale of the property, such as the seller, real estate agent or broker, builder, or associated entity.

Will My Lender Accept Gift Money in My Down Payment?

Lenders will generally accept gift funds as part or all of your down payment for the purchase of a primary or secondary home, but not for an investment property. The size of your down payment and strength of your credit score will determine the minimum borrower contributions that apply. Gifts received from a relative or domestic partner who has lived with you for the last 12 months can be considered part of the borrower's own funds, as long as both individuals will use the new home as their primary residence.

The following table illustrates typical limits regarding gift funds used toward your down payment or other closing costs.

Loan TypeMinimum Down PaymentLimits on Gift Funds
  • Conventional Loan:
  • one-unit primary
  • multi-unit residence
  • second home
20%None
  • Conventional Loan:
  • multi-unit residence
  • second home
< 20%5% minimum borrower contribution; remainder may be gift
FHA3.5% for credit scores > 580None
FHA10% for credit scores < 580None
VA0%None
USDA0%None

How to Document Gift Money for Down Payments

Qualifying gifts must be documented with your lender and evidenced by a signed letter from the donor, commonly known as a "mortgage gift letter," as well as a verifiable paper trail. The gift letter should include:

  • the dollar amount of the gift;
  • the date the funds were transferred;
  • a statement from the donor that no repayment is expected; and
  • the donor's name, address, telephone number and relationship to the borrower.

If your gift is from a relative or domestic partner, the gift can be considered part of your own funds. In order to meet the minimum down payment requirements, the gift letter must include a certification from the donor stating they have lived with the borrower for at least the past 12 months, and that they will continue to live with the borrower in the new residence. You should also provide documentation that demonstrates a history of shared residency with the borrower. This can include matching driver's license addresses and shared bills or bank statements.

In addition to the gift letter, the lender will need to verify that the donor actually has the funds to cover the gift. Proof of sufficient funding can include a copy of the donor's check and the borrower's deposit slip, a copy of the donor's withdrawal slip, the borrower's deposit slip, a copy of the donor's check to the closing agent (if paying closing costs directly), or a settlement statement showing receipt of the donor's check. When the funds are not transferred prior to settlement, the lender must document that the donor gave the closing agent the gift funds in the form of a certified check, cashier's check or other official check.

How is Down Payment Gift Money Taxed?

The IRS imposes taxes on the donor of any gift that exceeds the limit for annual gift tax exemptions. The annual gift tax exemption for 2018 is $15,000 per recipient, or a $5.6 million lifetime exemption for the donor. Any funds in excess of this amount are subject to the federal gift tax. However, there are ways to mitigate these tax implications.

The annual gift tax exemption is calculated per recipient, and was increased to $15,000 for 2018. As an example, if a husband and wife both received down payment gifts from one set of parents, each spouse could receive $30,000. In this situation, each of the two parents could contribute one check to their child and another to the child's spouse, for a total of four separate checks totaling $60,000. This would allow the parents to stay below the gift tax limit.

Another option is for the gift donor to file a gift tax return and count the gift toward their individual lifetime gift and estate exemption of $5.6 million. However, gift givers should beware that any funds applied toward this limit will also count toward any future estate they intend to leave to their descendants. Prior to gifting money for a down payment, it's a good idea to consult a certified public account to discuss the potential tax implications of giving gifts for a home down payment.

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