At Better Rate Mortgage, we can help you learn more about gift money, home purchases, applying for mortgages, and more.
If you’re lucky enough to have a family member or close friend who wants to give you money for a mortgage down payment, you may be wondering how this process works. Can you use gift money to buy a home? What steps do you need to take?
1. It is completely acceptable to use gifted funds for a down payment
First, let’s answer a common question. While it’s up to the mortgage lender to make the final decision, almost all lenders will let you use gifted funds as part of all of your down payment. This is a common practice, and most large lenders probably see applications that involve gifted funds every day.
2. Gift money can come from friends or family members
Only two groups of people can give you gift money to fund your down payment. First, government organizations can give you “gift money” as part of programs meant to help first-time homebuyers, but this is relatively uncommon.
In most cases, your gifted funds will come from a close friend or family member. However, you must prove that you have a long-standing relationship with this person. For a parent or other family member, that’s easy – you’re family.
However, you may need a little more proof if the funds are coming from a non-related person. Banks want to make sure this money really is a “gift” – not part of some mortgage fraud scheme.
3. You’ll need to provide a gift letter to your mortgage company
This letter is signed both by you and the person who gave you the money, which indicates that the gift money is a gift and is never expected to be repaid. You can find sample gift letters online and use these as a template.
4. It’s illegal to repay gift money
You cannot repay a gift. This is a type of mortgage fraud and is a criminal offense. Gift money must be freely given, and there must be no expectation of repayment. Otherwise, it’s a loan – which is much different and may disqualify you from mortgage approval.
5. Gift money has some tax implications
As of 2021, parents can contribute $15,000 each ($30,000 per child) for a down payment without filing a gift tax form with the IRS. Other family members each have a $15,000 lending limit.
If this limit is exceeded, the person gifting the money must file the gift on their tax return and either pay taxes on it or else count it toward the lifetime exemption, which is currently $11.58 million as of the 2020 tax season.
Also, there is no limit on what percentage of gift money can be used as part of a down payment for a primary residence, in most cases. But if you use a down payment to buy an investment property, you must pay at least 5% of your own money – the rest can be a gift.
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At Sean Zalmanoff: Better Rate Mortgage, we can help you learn more about gift money, home purchases, applying for mortgages, and more. Contact us online to schedule a consultation right away and get the help you need to find your new home in St. Louis.