It’s fairly normal for first-time buyers to receive down payment assistance from family members or close friends, but not everyone realizes there are quite strict rules in place that need to be adhered to.
For example, down payment assistance must be given as a gift. Otherwise, if it’s considered as a loan, the lender will need to factor that into its mortgage approval calculations, which means the buyer could qualify for a lesser amount. As such, buyers will need a gift letter from the person giving them the money, which states clearly that the giver does not intend on asking for the money to be returned, and that it really is a gift.
“The gift letter is very serious,” said Casey Fleming, mortgage adviser and author of “The Loan Guide: How to Get the Best Possible Mortgage, in an interview with Realtor.com.” “While it is doubtful that a lender would ever audit a file after the fact to see if the recipient is paying the donor back, if the transaction goes bad, you might very well find yourself with a subpoena in your hand.”
Remember, you cannot lie on a mortgage application. It’s a felony offense.
In addition to the letter, the gift giver may also be asked to provide bank statements.
Buyers will also need to receive the cash gift in advance, while they’re in the early stages of house hunting. That could help them to avoid possible delays later on, once they’ve found a home and made a bid.
“If the funds are ‘seasoned’ — meaning that they’ve been in the account long enough so that the last two bank statements don’t show the deposit — the gift does not have to be addressed,” Fleming said.
Still, buyers should note that there are limits on how much cash can be gifted without needing to pay tax on it. Any cash gift that’s above $14,000 will be taxed.
That said, “it is $14,000 per year per donor, so a couple could give $28,000 ($14,000 from each) to their child,” Fleming explained.