When a family member purchases a home, a gift can make a significant difference, but the giver must take many tax and non-tax factors into account.
You can give each recipient a gift of up to $18,000 ($36,000 for a married couple) in 2024 without having to worry about gift tax obligations.
Take into account gift and estate tax regulations and reporting obligations if you wish to give more than the yearly exclusion amount.
Also think about your family’s cash flow, retirement needs and estate plan, as well as the recipient’s.
Many first-time home buyers struggle to raise the money needed for a 2015–2020 down payment on a house, particularly if they are still paying off student loans.
Certain parents choose to give their adult children money as a down payment to help them achieve their goal of becoming homeowners. Those who are able to contribute to their child’s down payment without jeopardizing their own retirement may choose to do so. They might see it as a means of having an influence and enabling their loved ones to achieve their objectives while still being able to observe the outcomes.
If you determine this is right for your situation, consider the rules on gifting money to family.
Purchasing a home is a significant milestone, and for many, it wouldn’t be possible without a helping hand. If you’re wondering, “Can my parents give me money to buy a house?”, the answer is a resounding yes. In fact, many loan programs encourage gift funds from family members, including parents, grandparents, siblings, spouses, domestic partners, and significant others. Some lenders may even allow gifts from non-relatives.
This guide delves into the intricacies of receiving gift money for a down payment, exploring the eligibility requirements, documentation, tax implications, and potential roadblocks you might encounter. Whether you’re just starting your homeownership journey or are actively searching for your dream abode, this comprehensive resource will equip you with the knowledge you need to navigate the process smoothly.
Navigating the Maze of Eligibility Requirements
Before diving into the specifics of receiving a gift for your down payment, it’s crucial to understand the eligibility criteria set by different loan programs. Here’s a breakdown of the most common requirements:
- Relationship to the borrower: Most loan programs allow gifts from close family members, including parents, grandparents, siblings, spouses, domestic partners, and significant others. Some lenders may also permit gifts from non-relatives, but this is less common.
- Documentation: The lender will require specific documentation to verify the source of the gift funds. This typically includes bank statements, gift letters, and proof of the donor’s relationship to the borrower.
- Gift limits: Some loan programs have limits on the amount of gift funds that can be used towards the down payment. For instance, FHA loans allow for 100% gift funds, while conventional loans typically allow up to 20% of the purchase price as a gift.
- Creditworthiness: Even with a gift for the down payment, you’ll still need to meet the lender’s creditworthiness requirements. This includes having a good credit score and a stable income.
Essential Documentation: Keeping Your Paperwork in Order
Once you’ve confirmed your eligibility, it’s time to gather the necessary documentation Here’s a checklist to ensure you have everything in order:
- Gift letter: This letter should be signed and dated by the donor, stating that the funds are a gift and not a loan. It should also specify the amount of the gift and the purpose (down payment for a home purchase).
- Bank statements: The lender will need to see bank statements for both the donor and the borrower, covering a period of 60 to 90 days. These statements will verify the source of the gift funds and ensure that the donor has sufficient funds to make the gift.
- Proof of relationship: If the donor is not a close family member, you’ll need to provide documentation proving your relationship. This could include a birth certificate, marriage certificate, or a legal document establishing the relationship.
Tax Implications: Understanding the Financial Landscape
While receiving a gift for a down payment is generally not taxable, there are a few exceptions to be aware of. If the gift exceeds the annual exclusion limit (which is $17,000 per donor in 2023), the donor may be required to file a gift tax return. However, this doesn’t mean the recipient will owe any taxes.
It’s crucial to speak with a tax professional to comprehend the precise tax ramifications of accepting a gift as a down payment. They can guide you through the intricacies of tax legislation and make sure you abide by all rules.
Potential Roadblocks: Avoiding Common Pitfalls
While receiving a gift for a down payment can be a significant advantage, there are a few potential roadblocks to be aware of:
- Lender restrictions: Some lenders may have specific restrictions on gift funds, such as requiring a certain percentage of the down payment to come from the borrower’s own funds. It’s crucial to discuss these restrictions with your lender before accepting a gift.
- Documentation errors: Incomplete or inaccurate documentation can delay the loan process. Ensure you have all the required documents and that they are filled out correctly.
- Tax implications: As mentioned earlier, exceeding the annual exclusion limit could trigger tax implications for the donor. Consult with a tax advisor to avoid any potential issues.
Receiving a gift for a down payment can significantly boost your chances of achieving homeownership. By understanding the eligibility requirements, documentation, tax implications, and potential roadblocks, you can navigate the process smoothly and confidently. Remember to consult with your lender and a tax advisor to ensure you’re meeting all the necessary requirements and avoiding any potential pitfalls. With careful planning and preparation, you can turn your dream of homeownership into a reality.
Overview of Gifting to a Child or Family Member for a House
The IRS definition of a gift is significant because giving money or property as a gift may have an impact on the donor’s estate tax exemption, lifetime gift, and reporting obligations.
Rather than only providing a down payment assistance, some parents might prefer to just give their adult children a house. However, giving a family member or child ownership of a property is not as easy as handing them the keys. The parents own retirement needs and legacy goals to family members and charities must be considered.
If you want to help your family member obtain a home, there are options. You have three options: give the property as an inheritance, give it outright, or finance your child’s or family member’s purchase. However, it’s advisable to speak with your team of advisors, which includes a tax advisor, estate planning lawyer, and financial advisor, because there are gift and estate tax regulations in addition to reporting obligations for the donor.
Gift Letter for Mortgage
The lender will most likely need proof of gift if your child plans to use it as a down payment on a house mortgage. To find out the requirements for documenting a gift of a down payment, you or your adult children should contact the mortgage lender. Mortgage lenders have these rules to protect themselves against fraud or default.
Gifts are generally permitted for the full amount of the down payment on a primary residence. Depending on which type of loan the borrower is applying for—conventional, VA, or Federal Housing Administration (FHA)—details may change.
If money has been in the borrower’s bank account for less than 60 days, there might be additional procedures. The gift giver may need to provide bank statements from where the funds originated. A letter stating that the funds are a gift and do not need to be returned might also be required. Gift letters ought to include information about the donor’s identity, amount, and date of the fund transfer. You may want to keep a paper trail to document this, too.
Gift money cannot be used toward the down payment on an investment property that your child or family member is buying with a mortgage loan. However, if your child is purchasing the property in cash (without a mortgage), they can use gift funds.
A down payment on a primary residence purchased by your child with a mortgage loan may be made with gift money. But the majority of mortgage lenders won’t let presents from friends or acquaintances be applied toward a down payment. Anybody connected to the borrower by blood, marriage, adoption, or legal guardianship is acceptable as a source of gift money for a traditional loan.
My Parents Are Gifting Me a Down Payment For a House. What Does the Bank Need to Know?
FAQ
Do I have to pay taxes if my parents give me money for a house?
Can my parents give me $100 000?
Do I have to report money my parents gave me?
How much money can be legally given to a family member as a gift?
Can a family member give a gift to buy a home?
If you’re buying a home, you can only use a cash gift from an immediate relative to help get a mortgage to buy a home. That means a parent, grandparent, sibling, or spouse. It’s also generally acceptable to receive gifts from a domestic partner, or significant other, if you’re engaged to be married.
Can gift money help you buy a home?
Another great advantage of using gift money to help with your home purchase is that it can help you come up with a down payment more quickly which can put you one step closer to buying a home. To learn more about how gift money works, or to discuss low down payment programs, contact a Home Lending Advisor.
How do parents help a child buy a house?
Keys for a house. Often, parents help out their young adult children in buying that first home, via a loan. Bruce Bell, an attorney at the Chicago office of Schoenberg Finkel Beederman Bell Glazer explains how to do so. Larry Light: Let’s say my spouse and I lent our daughter and her husband the full amount needed to purchase the dwelling.
Can I buy my parents’ home with cash?
You can purchase your parents’ home with cash or financing. The latter involves shopping and applying for a mortgage loan. You’ll need to qualify based on your income, credit, and other factors. Or, if your parents’ mortgage is assumable, you may be able to pay a flat fee and assume the existing mortgage and its debt.