When shopping for a home, buyers often require extra funds to help with the down payment and closing costs. And while FHA offers programs with as little as 3.5% down, a cash gift from family members can prove very useful.
There’s no limit to the amount of cash a borrower can receive in the form of a gift –but lenders do that require several guidelines are met. Here’s a breakdown of these guidelines, along with a few tips.
You’ll need a gift letter
The bank will need to obtain a gift letter detailing the donor’s name, the recipient’s name, their relationship, the amount of cash gifted, the property address, and the source of the funds.
Non-family members must verify a longstanding relationship
Gift certificates to iTunes are one thing, but a down payment for a home is a completely different ballgame. If the gift is made by any non-family member such as friend, employer, etc., then the borrower will need to provide documentation of a very close and long lasting relationship. High School Debate Team photos probably won’t count.
The donor must be an independent source
The lender will need to verify that funds were not made available from any person involved with the sale of the property (including the seller, broker, real estate agent, loan officer, etc.) and that the gift doesn’t have to be repaid.
Funds have to be “seasoned”
Keep in mind that gifts may need to be seasoned (i.e. funds will need to be held in the borrower’s account for several months). Consult with your mortgage advisor for details, because guidelines on this vary from lender to lender. Long story short: you can’t get a gift for a down payment on the morning you’re set to close.
How do gifts affect taxes?
According to our industry expert Marc Heller (Partner and Director of Technical Tax at Warady and Davis), gift recipients never have to pay tax on the gifts they receive. Gift donors can give up to $13K per calendar year to an unlimited number of recipients, without the need to file any sort of return. For instance, a parent with three children can give them each $13k, totaling $39k in one year and not have to file a return.
For more information, please listen to a recent edition of the PERL Mortgage Podcast.
Source: zillow.com