All You Need to Know About Obtaining Gift Money For Down Payment on a Home Purchase in Florida
Raising a sizeable down payment sets your homeowning journey on a high note. However, given the average home in the United States costs almost $350,000, raising the standard 20% deposit is quite prohibitive. While FHA and other proprietary home loans have a much lower threshold, raising a home deposit by yourself remains a tricky affair.
A down payment gift puts you closer to your dream of owning a home. However, this is a delicate, highly regulated process that requires careful consideration. Luckily, there's a legal provision that allows your family, friends, and other well-wishers to chip in and help you raise the down payment.
Down payment gift money is subject to strict legal requirements, or you and the donor may run into trouble down the road. From writing a gift letter to eligibility and repaying gift funds, everything you need to know about mortgage gifts.
How Do You Pay a Mortgage Deposit with Gift Money?
While some lenders are amenable to letting you buy a home without one, it's often advisable to put some money down. Raising a sizeable down payment increases your chances of success and securing excellent mortgage terms. Ideally, you should raise anything from 3% to 20% of the home value when applying for a mortgage.
With the average home in the US priced at $344,141, most people have trouble raising a sizeable deposit. A 20% deposit on the average home is north of $60,000, a small fortune for a population already burdened by crippling debt.
Mortgage gifts are a hit among the millennials, a group that's plagued with large student loans and high credit card bills. In 2020, 42% of the homebuyers couldn't raise their home deposits independently. They had to resort to other means, including using gift money to put some money down. Securing gift funds improves your chances of realizing your dreams of owning a home.
While useful, using gift funds for a down payment is a delicate, highly regulated process. You must provide evidence to your lender that the money is a genuine gift from an eligible source before you can use it to pay down your new home. Only two specific groups can support your homeowning dream with a mortgage gift.
Family members - Anyone related to you by blood, marriage, adoption, or legal guardianship can offer gift money. Some loans allow friends to support your dreams, while others prohibit them.
- Government agencies, non-profits, and other agencies offer down payment assistance to first-time homebuyers.
Down Payment Gift Best Practices
The government and the banking sector highly regulate down payment gift funds to prevent abuse. Here's what you need to know to use the gift fund for your home deposit.
- Always have the gift giver provide you with a signed statement
- Remind the person providing the gift to keep proper records
- Get the gift giver to transfer the money into your account well in advance.
- Understand the value of using seasoned money for your home deposit.
- Build an understanding of gift fund limitations and avoid gift tax
- Understand how gift fund rules apply to your choice of home loan
- Never misclassify a loan as a gift
- Never vary the gift amount without providing a valid explanation
- Don't expect the gift fund rules to apply across the board.
- Don't abandon your mortgage loan when the going gets tough
Is a Gift Fund Refundable?
No, a gift fund is non-refundable. Once someone gifts you the funds for a home deposit, you may not legally pay them back. If anything, paying back a mortgage gift is classified as mortgage fraud.
Paying back a mortgage gift is illegal because it misleads the bank. Bankers use your current debt-to-income ratio to calculate your mortgage. If you declare the money as a gift, it lowers your debt-to-ratio income, and you may qualify for a higher loan amount.
However, the gift is a loan; you may run into financial headwinds down the road. You'll need to pay back the loan at some point, which will lower your disposable income. That may impact your ability to make pay your mortgage, putting your dream home at risk. At this point, the bank may discover the lie and prefer mortgage fraud charges against you.
What You Need to Know About Mortgage Gifts
Misclassifying a down payment loan as a mortgage gift is illegal and can land you hot water. Be clear with your lender from the onset and provide tangible proof confirming that the money you received was indeed gifted.
Showing up with a wad of untraceable cash won't work. Any unaccountable money will raise red flags, making the lender suspicious and likely to deny your mortgage application.
Ask your lender for guidance and assistance to help you report the gift property on your tax returns. You and the person providing the gift are responsible for notifying the IRS about the gift funds.
Tax Implications of a Mortgage Gift
Mortgage gifts are tax-deductible since they don't count as income. You're not required to pay taxes on the gift money, but you must report the money on your annual tax returns. To ensure that you're entirely off the tax hook, the amount of money you receive must follow the gift tax guidelines.
Parents who jointly file their taxes can collectively donate $32,000 to each child. Gift funds from other family members are capped at $16,000 each. Anything above these prescribed amounts triggers a gift tax, as high as 40%, depending on the gift amount.
Everyone is entitled to a $12.06 gift tax exemption in their lifetime. But that's not to mean that someone can't donate more than $16,000 to support your homeowning dreams. If the donor wishes to go higher, they have two viable options. They can either pay the appropriate gift tax or claim the money as part of their lifetime gift tax exemption.
Claiming a lifetime exemption has far-reaching tax implications, especially for donors who wish to pass a sizeable inheritance to their children. Using up the exemption may force the heirs to pay taxes on their inheritance.
A Down Payment Gift Simplifies the Home Buying Process
A mortgage gift is a shot in the arm when looking to buy a home. The gift funds pad your home deposit, making it possible to hit or surpass the 20% threshold. Raising 20% of your home loan lowers your interest rates and eliminates private mortgage insurance. It also increases the likelihood of securing the loan to buy the home.
Since stringent rules govern mortgage gifts, it's essential that you fully understand their requirements. Your lender can help you pick a loan that best fits your financial situation. They can also help you take the appropriate steps when accepting a mortgage gift. A skilled realtor will advise you on how much money you can use for the home deposit, who can donate the money, and how to write a gift letter.
What are Gift Letters?
You need to prove your relationship with the person providing the gift money before you can funnel it to your home deposit. A gift letter confirms the nature of the relationship with the person providing the gift money.
Besides establishing the relationship, a gift letter must explicitly state that the money is a non-refundable gift. It must clarify that the giver has no future repayment expectations. Both you and the give must sign the gift letter for authenticity.
Besides the signed gift letters, the lender may require additional proof from the party providing the gift. The bank may request the giver to provide bank statements as proof there are sufficient funds in their account to cover the contribution. Alternatively, the bank may ask you to provide a bank slip showing the transfer of the funds to your account.
Ideally, a donor should transfer the gift funds to your account before or during the application process. By this time, the money will appear in both your bank statements. This grace period allows the bank to conduct due diligence. It also enables the bank to confirm the money came from a legitimate source. The bank also needs time to establish that you have an appropriate relationship with the person providing the funds.
You may still use the gift funds to buy a home even when a donor transfers the money to your account after the settlement process. You'll need to provide documentation such as the receipt of the cashier's check you gave to the closing agent.
Why Do You Need Gift Letters?
There are two reasons why you need to provide a gift letter with every gift you intend to use to buy your dream house. You need the letter to reassure the bank that the money is non-refundable and not another loan to be paid. It helps the lender assess your debt-to-income ratio (DTI).
Any repayment expectations would mean that your DTI takes a hit. A high DTI may lower your income and impede your ability to make timely monthly repayments on your mortgage.
Secondly, government agencies keep a keen eye on gift funds to crack down on money laundering schemes. The government seeks to confirm that the money is legitimate and adheres to all the gift tax laws.
Gift Letter Rules for Different Types of Homes Loans
Gift fund rules vary depending on the type of home loan you're using to finance your home. Typically, each gift letter requires you to detail your relationship with the person providing the gift funds.
The letters vary to accommodate gift-giver criteria between the home loans. However, one cardinal rule to mortgage gifts is that you may not receive one from an interested party. Interested parties include a developer, builder, seller, realtor, or anyone directly or indirectly involved in the transaction.
A VA loan enables eligible veterans and active military service members to buy a home with 0%. If you're eligible for a VA loan, you can receive a gift to help you purchase the house from just about anyone. You'll need a gift letter with the donor's information, relationship to the borrower, and the gift amount. You should also provide bank statements from you and the donor detailing the transfer.
While you may use the gift money to cover the deposit and closing costs when taking out a conventional loan, they're pretty restrictive. You can obtain gift funds from immediate family members and close relations.
Freddie Mac and Fannie Mae classify children, spouses, and dependents as relatives. People related to you by blood, marriage, guardianship, or adoption may help fund your dream house. Domestic partners and fiancées are also eligible.
Besides a gift letter, you should provide your bank statement, the gifter's bank statement, and a copy of the check when using gifts to put a home deposit when taking out a conventional loan.
You have more gift fund options when buying a home with an FHA loan. Besides your relatives, you may receive the gift funds from your employer, close friends, or labor union. Additionally, you may receive funds from government agencies offering homeownership assistance grants. FHA loans also have stricter documentation requirements. You'll need to provide
- A gift letter signed by both parties
- A copy of the giver's withdrawal slips or check
- Your deposit slips
- A copy of the donor's check to the closing agent
- A copy of the certified check
- Proof of wire transfer
USDA loans are critical in helping folks living in rural America achieve their homeownership goals. You may use gift funds for a down payment when using a USDA loan to purchase a home. Besides relatives, you may receive gift funds from anyone who isn't involved in the transaction.
Besides a gift letter, you should provide a copy of the gifter's canceled check and a bank statement verifying the deposit if you have the funds in your account. If the donor provides the money at closing, you should provide copies of the canceled checks or wire transfer and a copy of their bank statement.
Down Payment Rules
The planned use of the real estate property has a significant impact on how you can use the gift funds.
Primary residence - You may use a VA, conventional, FHA, or a USDA loan to purchase your primary home. Depending on the type of loan, you may use the gift funds to cover the down payment or closing costs.
Secondary residence - Your loan options are somewhat limited when looking to buy a second residence. In most cases, your choices are limited to a conventional loan. While you may still use gifts to fund the purchase, the lender may require you to supplement the gift with your funds when closing on your second home.
- Investment properties - While you may use gift funds to purchase an investment property, it should not cover the entire down payment. You need to raise at least 5% of the deposit yourself when buying a real estate investment property. There are no concerns about using gift funds to purchase an investment property outright if the gift amount is below the $16,000 cap. Naturally, you must abide by the tax rules governing the limits of gift funds.
How Much Money Qualifies as a Gift?
The amount of money you can receive as a mortgage gift depends on the source. Parents who file jointly have a $32,000 gift funds limit per child to help with a deposit. Anything higher than $32,000 attracts a gift tax, ranging from 18% to 40%, depending on the gift amount. Other family members have a $16,000 gift fund limit before the gift tax kicks in.
There's no limit to how much gift money goes into the down payment when buying a primary residence. You may use gift funds to pay off the entire deposit if possible. However, you need to raise at least 5% of the deposit yourself when buying a second residence.
Advantages of Seasoned Money
Using gift money for a home deposit is a carefully regulated process. Adequate planning heads off any nasty surprises that may derail the process. If anything feels off, you may lose the advantage of the gift funds.
You should ensure the gift money is seasoned and documented when you're using it, for starters.
Lenders demand credible proof that the funds have spent considerable time in your account before buying the home. They want the assurance that you haven't been running around raising the money on a short-term basis.
Typically, seasoned gift funds should sit in your bank account for two months before initiating the homebuying process. Anything shorter than this will raise red flags that may deny you the advantage.
The bank won't question the source of the gift money if it's been sitting in your account for at least three months because that's seasoned money. Seasoned money shows you're in great financial shape and aren't trying to game the system.
Fast-track Your Home Ownership Dreams
Thanks to gift money, your friends, family, and well-wishers can band together and help you join the prestigious rank of homeowners. They can help you raise a substantial down payment and increase the chances of qualifying for a home loan. However, you must ensure the gift money checks all the right boxes to avoid trouble with the law and your lenders. Without triggering a gift tax, your parents can kick up to $32,000 toward your down payment. Other relatives are limited to $16,000 each, but you're not limited in the number of relatives who can participate.