Buying a house is a significant financial undertaking and coming up with the down payment can be a major hurdle. Fortunately there’s a way to get help with this crucial step: down payment gifts. But before you start dreaming about a windfall from your generous relatives, it’s essential to understand the rules and regulations surrounding this financial assistance.
What is a Down Payment Gift?
A down payment gift is a sum of money given by a family member or close friend to help a homebuyer purchase a house. This gift can be used towards the down payment, closing costs, or even reserves required by the lender.
Who Can Gift Down Payment Funds?
Not just anyone can contribute to your down payment. Lenders have specific guidelines regarding acceptable sources for these gifts. Generally, the following individuals qualify as acceptable donors:
- Family members: This includes parents, grandparents, siblings, children, and even domestic partners or significant others if you’re engaged.
- Close friends: In some cases, lenders may accept gifts from close friends, but this is less common and may require additional documentation.
Down Payment Gift Restrictions:
The amount you can receive as a down payment gift depends on the type of mortgage you’re taking out:
- Conventional loans: If you’re putting down 20% or more, the entire down payment can be gifted. For smaller down payments, a portion will likely need to come from your own funds.
- FHA loans: The entire down payment can be gifted unless your credit score is below 580. In that case, you’ll need to contribute at least 3.5% yourself.
- VA loans: Similar to FHA loans, the entire down payment can be gifted unless your credit score is below 580.
Documenting a Down Payment Gift:
Lenders require detailed documentation for down payment gifts. You’ll need a letter with the following information:
- Donor’s name and relationship to you
- Date and amount of the gift
- Statement confirming the money is a gift and not a loan
Both you and the donor need to sign this letter. Additionally, the lender may request supporting documents like bank statements from the donor and deposit slips showing the transfer of funds.
Tax Implications for the Giver:
The IRS imposes a gift tax on certain monetary gifts exceeding a specific threshold. As of 2023, you can gift up to $17,000 to any one person without incurring the tax. Married couples filing jointly can gift up to $32,000 to a child or other family member.
Benefits of Down Payment Gifts:
- Reduced financial burden: A down payment gift can significantly reduce the amount you need to borrow, lowering your monthly mortgage payments.
- Improved loan terms: A larger down payment often leads to better interest rates and loan terms.
- Faster homeownership: By reducing the time it takes to save for a down payment, a gift can help you achieve your dream of homeownership sooner.
Things to Consider Before Accepting a Down Payment Gift:
- Gift tax implications for the donor: Ensure the donor understands their potential tax liability.
- Documentation requirements: Be prepared to provide the necessary documentation to the lender.
- Impact on your relationship: Discuss the gift openly with the donor to avoid any misunderstandings or expectations.
Alternatives to Down Payment Gifts:
If a down payment gift isn’t an option, consider these alternatives:
- Government-backed mortgages: FHA and USDA loans require minimal or no down payments.
- Zero down payment loans: Some conventional loans offer zero down payment options, though eligibility requirements may be strict.
- Down payment assistance programs: Explore local and national programs that offer down payment assistance to eligible buyers.
Down payment gifts can be a valuable tool for aspiring homeowners. However, it’s crucial to understand the rules, documentation requirements, and potential tax implications before accepting this financial assistance. By carefully considering these factors, you can make informed decisions and navigate the homebuying process smoothly.
What is a gifted deposit?
Let’s start with the basics and discuss what a gifted house deposit is.
Simply put, a gifted deposit is when family members give you money towards your deposit. They are free to donate as much or as little as they like, but keep in mind that there may be inheritance taxes.
A deposit is usually at least 10% of a mortgage. Given the £240,000 cost of the property, you will need to have at least £24,000 available to cover the deposit. A gift can help a lot towards this.
A gifted deposit means you’ve been given money towards, or to fully cover, your deposit amount. This is not a loan, and the individual providing the funds has no ownership interest in your belongings. The funds must be donated freely, with no conditions attached and no expectation of repayment in the future.
Understand the legal implications
No repayment is expected for a gift, and this needs to be declared. Your mortgage adviser, lender, and conveyancer will require a gifted deposit letter signed by the donor, stating:
- Their name and yours
- The amount gifted
- Verification that this is a gift with no financial obligations or ownership stake
- A statement that the gift has no commercial interest
- Verification that the donor is in a position to give the gift and is solvent financially
CAN YOU USE GIFTED FUNDS FOR DOWN PAYMENT OR CLOSING COSTS?
FAQ
Can someone gift me money for a down payment on a house?
Does a mortgage gift letter get reported to the IRS?
What is a gift letter for mortgage down payment?
What are the rules for gifting money to family members?
Do you need a gifted deposit to buy a house?
When you’re buying a home with a mortgage, you need a deposit to put as a down payment on your mortgage. When you receive a gifted deposit it should be exactly that, a gift. So, the donor shouldn’t expect to be paid back or have any ownership of the property in exchange. How does a gifted deposit work?
Is a gifted deposit a loan or a gift?
That last part is crucial. A gifted deposit must be a gift with no strings attached. If you’re expected to pay back the money you’ve been given towards your deposit, it’s not a gift, it’s a loan (and this can affect your ability to get a mortgage – more on that below).
Can I buy a house with a gift deposit?
Yes, anyone buying a house needs to be able to prove where they got their deposit from. This applies to gifted deposits too. You must provide what’s called a ‘gifted deposit letter’. This is a letter written to your solicitor as proof that the deposit is a gift and not a loan.
Can you give a deposit as a gift?
Gifted deposits are widely accepted by lenders, as long as you can prove that the money is a gift. Lenders are also becoming more flexible on who they accept gifted deposit from. For example, Nationwide allows anyone over the age of 18 to gift a deposit.