How to Document Mortgage Down Payment Gifts

A couple cooking in a new home they bought with mortgage down payment gifts.
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Saving a down payment is one of the most important—and often most challenging—aspects of buying a home. The larger your down payment, the less you have to finance, which can lead to lower interest rates and monthly payments over the life of your loan. Furthermore, a large down payment can help you avoid costly private mortgage insurance

Unfortunately, many would-be buyers struggle with getting a down payment together. In a 2017 Zillow survey, nearly 70% of renters said saving a down payment was the biggest hurdle to buying a home.

If you're ready to become a homeowner, asking your family for help with your down payment may have crossed your mind. While down-payment funds can be gifted between family members, you must follow a list of rules to document the gift, including a down payment gift letter. 

Down Payment Gift Guidelines

The amount of down payment funds that can be gifted from your parents or another family member typically depends on the type of mortgage loan involved. If you have a credit score of 580 or above, you might be eligible to receive an FHA loan with a 3.5% down payment. If your credit score falls below 580, you will need to put at least 10% down. If your credit score falls between 580 and 619, then 3.5% of your down payment must come from your own income. FHA loans only allow funds to be used on primary residences.

On the other hand, if you're using a conventional Fannie Mae or Freddie Mac loan, the entire down payment can be a gift if you're putting down 20% or less of the home's purchase price.

"A borrower of a mortgage loan secured by a principal residence or second home may use funds received as a personal gift from an acceptable donor. Gift funds may fund all or part of the down payment, closing costs, or financial reserves subject to the minimum borrower contribution requirements. Gifts are not allowed on an investment property."

Down Payment Gift Letter

Once you've worked out how much of your down payment funds can be gifted, the next step is developing a down payment gift letter with your benefactors. This is required by the lender whenever part or all of your down payment is a gift. There's a specific process for writing the letter and documenting the gift. 

For the letter itself, some lenders have standard forms, but others do not. You can type up the letter yourself or ask your real estate agent or broker to help, but in general, you'll need to include:

  • Your name and the name and address of the person making the gift
  • The amount that's being gifted to you
  • The address of the home you're buying
  • The relationship of the person who's making the gift
  • Where the money's coming from (i.e. a checking account, savings account, investment account)
  • A clear explanation that the money is a gift, not a loan (borrowed funds are not allowed for down payment gifts)

Note:

Gifts are only allowed if they're from family members, not friends. An exception applies if you're engaged and your partner is providing the gift.

Documenting the Gift Itself

When documenting a down-payment gift, you'll need to include documentation of where the gift is coming from and your receipt of it.

For instance, the lender may ask to see a bank statement or other form of proof verifying that the donor has the money to gift to you. A copy of a canceled check made out to you or paperwork showing an electronic transfer between the donor's account and yours will work fine.

If the person gifting the funds to you is selling shares of stock or other investments to raise the cash for a down payment, you'll need a statement from their brokerage account showing that transaction.

Whether you're receiving a check or an electronic transfer from your benefactor, make sure to deposit this money into a separate bank account apart from your checking or savings. You don't want to commingle gift funds with any of your other finances. Doing so could complicate the paper trail and cause the lender to reject the gift altogether. 

Tax Implications for Down Payment Gifts

As the person receiving a down payment gift, you won't incur any tax liability, regardless of the gift amount. However, the person making the gift to you can trigger a gift tax if the amount exceeds the annual exclusion limit.

For 2020, for instance, parents who are married and file a joint return can gift up to $30,000 per child for a mortgage down payment (or any other purpose), without incurring the gift tax. Other family members, such as a single parent, grandparent or aunt, could gift up to $15,000 before the gift tax applies. 

It's not always easy to mix family and finances. Make sure that accepting a gift is the right move for keeping your family happy. The best thing you can do is talk through the potential benefits, hardships, and the tax implications with the person or persons who are planning to gift the money.

Other Ways to Raise Down Payment Funds

If a down payment gift isn't an option, consider other possibilities for raising the money you need to buy a home.

For example, you could extend your timeline for buying and work on saving money. Or you might decide to sell things you own or start a side hustle or business to create additional cash flow you can save.

Down payment assistance programs are another option. These programs can provide grants and cash assistance to help cover down payments and in some cases, closing costs, for eligible homebuyers. Down payment assistance programs can be offered by private organizations or through your state housing agency.

Article Sources

  1. Zillow. "Down Payment the Top Hurdle Holding Back Would-Be Home Buyers." Accessed Feb. 12, 2020.

  2. Department of Housing and Urban Development. "Handbook 4000.1, FHA Single Family Housing Policy Handbook." Page 163. Accessed Feb. 12, 2020.

  3. Fannie Mae. "Selling Guide." Accessed Feb. 12, 2020.

  4. IRS. "Frequently Asked Questions on Gift Taxes." Accessed Feb. 12, 2020.