How to Receive a Gifted Downpayment Correctly

Buying a home is a hefty undertaking and sometimes help coming up with a down payment is necessary. A lot of first time home buyers receive some, if not all, of their down payment as a gift. It can come from parents, relatives, or even very generous family friends.

A good amount of the first time homebuyers are facing circumstances like a stupid amount of student debt which makes saving for a down payment quite difficult. Obtaining a large sum of money like this isn’t as easy as just being handed a lump sum of money.

There’s a way to do it, and doing it right is critical. Avoiding these mistakes will help ensure you do it right.

The down payment needs to be a gift

Your down payment being a gift is absolutely mandatory. If the lender believes you were loaned the money they will believe you must repay it, and factor it into your loan amount. In this case it could affect the amount of your loan and leave you with an amount less than what you wanted.

To prove your gift is a gift you must receive a gift letter from the person who gave you the money. In the letter they need to make clear they do not expect to be repaid for the said amount.

The gift letter is a serious matter. It is possible, but highly doubtful, that the lender follows up and sees you are paying back the “gifted amount”; in which case you could find yourself being subpoenaed. Yeah, that’s pretty serious as lying on a mortgage application is a felony.

Get the down payment in advance

You will have two options when getting help. The first being during the planning stages getting your gifted money then and the second being when you’re ready to buy have the person gifting the money send it right before you walk into the bank’s office.

Either way works, but having it earlier rather than later is always better.

If the gifted money has been in the bank account for a while (past two bank statements) the gift letter doesn’t need to be addressed.

Know the limit so it won’t be taxed

Timing can be tricky, but that isn’t the only part of it. There’s a limit to how much you can receive tax-free. Any amount over $14,000 will be taxed under the current laws. SO your gift will have to be less than that, or pay a penalty if they choose to send more.

As with most laws, there is a loophole. The loop hole here is that each donor (mother and father) could give the max amount, totaling $28,000 to be received by the homebuyer. One gifted amount, per donor, per year.

Gifted down payment must be verified

Even though having a gift letter is important, it may not be enough for the lender to verify the cash. There will need to be a paper trail. A bank statement should be enough. Two months of a bank statement should be sufficient for the gifter’s account.

IT can be quite invasive as the lender will need to see details including their bank account number and personal information.

The gifter won’t go broke helping you

The lender needs to know whoever is giving you this gift isn’t giving away all their money. They must prove with bank statements they can afford to give you this sum of cash. 

If separate accounts are being used to fund your down payment, make sure to inform the lender of how this is happening and be ready to provide proof of plentiful leftover funds.

The best thing you can do is show some gratitude to that special person(s) giving you this amount.

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