How to receive, give down payment

If you’re lucky enough to get down-payment help under the tree this year (or generous enough to give it), be sure you know the rules around gift funds. It’s not as simple as handing over a wad of cash with a note that says “Happy Holidays! Here’s a little something for your new house.”

Down payment gift funds must meet certain requirements or the gift giver and recipient face trouble down the down. From writing a gift letter to rules around repaying gift money, here are basic facts homebuyers and donors should know.

WHO CAN GIFT A HOUSE DOWN PAYMENT?

It might seem odd that there are restrictions around who can give someone cash for a down payment. After all, cash is cash, right? Not necessarily. Cash can come with strings attached, which might affect the borrower’s ability to repay the mortgage.

Lenders want to protect themselves against default by making sure the gift money is what it appears to be (e.g. a gift, not a loan) and the borrower can afford the mortgage. If the borrower gets a down-payment loan from a co-worker and calls it a “gift,” their debt-to-income ratio rises, which can affect their ability to repay their mortgage. So, to protect themselves, the GSEs that back mortgages and U.S. Department of Housing and Urban Development have created rules for donor eligibility.

For conventional loans — which include 30-year fixed-rate mortgages — the giver must be a relative, according to Fannie Mae. People who are considered relatives include a spouse, child, or other dependent, in addition to anyone related by blood, marriage, adoption, or legal guardianship. Domestic partners and fiances are also eligible to give funds for a down payment.

FHA loans offer a broader eligibility range, according to data from HUD. Givers can include family members, friends (“with a clearly defined and documented interest in the borrower”), labor unions and employers. Charitable organizations can make contributions toward a down payment. FHA borrowers can take advantage of down-payment assistance programs for eligible homebuyers, including first-time and low-income buyers.

Those who can’t gift down-payment money to homebuyers include:

• Sellers.

• Real estate agents or brokers.

• Homebuilders.

• Anyone with a vested interest in selling the house.

HOW MUCH OF A HOME DOWN PAYMENT CAN BE GIFTED?

For both conventional and FHA loans, the total amount of the down payment can be gifted, in most cases.

FHA loans require a minimum of 3.5 percent down with credit scores greater than or equal to 580. For credit scores between 570 and 500, FHA requires 10 percent down. In both instances, the entire down payment can come from an eligible donor.

Family members may also give FHA borrowers equity credit as “a gift on property being sold to other family members,” according to HUD.

For conventional borrowers, the only time there’s a requirement that borrowers must use their own funds for a portion (5 percent or more) of the down payment is when the loan-to-value ratio is equal to or above 80 percent and the property is either a second home or two- to four-unit principal residence.

WHAT IS A DOWN-PAYMENT GIFT LETTER?

Whenever an eligible party gives money for a house down payment, they have to write a gift letter, says Kevin Eyman, president of Mountain Mortgage in Medford, Ore.

“When someone gifts funds it’s usually done at closing or close to closing, that’s what family members do because they want to make sure the money is used for the home purchase,” Eyman says. “In order to give someone money for a down payment they have to write a letter explaining who they are and what the money’s for.”

This letter is a straightforward statement explaining just the facts: who the donor is, how much they’re giving, where the money’s coming from and that they don’t expect to be repaid. The letter should also include when the funds were transferred as well as the giver’s contact information.

Both the giver and the homebuyer must sign the letter, which doesn’t have to be notarized.

Conventional-loan requirements include extra steps if the down payment is made up of gift money and the borrower’s own money. In that case, the relative or partner must prove that they have lived with the homebuyer for the past 12 months and will continue to live together in the new house.

HOW DO I PROVE I RECEIVED THE GIFT MONEY?

Lenders want to make sure that the down-payment money has been received by the homebuyer in order to proceed with the loan. Buyers can provide:

• A copy of the gift giver’s check or withdrawal slip and the homebuyer’s deposit slip.

• A copy of the gift giver’s check to the closing agent.

• A settlement statement showing receipt of the donor’s monetary gift.

• Copy of certified check.

• Proof of wire transfer.

IS THE GIFT MONEY TAXED?

The IRS currently gives people a lifetime gift exemption of up to $11.4 million, which applies to any gifts you make over the course of your lifetime. Anytime you gift more than $15,000 (for a single person) or $30,0000 (married) in one year, the excess counts against your lifetime amount. Keep in mind, the $15,000 limit might change annually due to factors like inflation.

“Being this close to the end of the year, the gift-giver may want to consider withholding $15,000 (or $30,000 if married) of the gift for January, so as to avoid wasting their gift tax exemption,” says Michael Olivia, senior partner at Westpac Wealth Partners. (This way the giver could take the full exemption in both years.) “The gift-giver would write a check, or if they’re less trusting of the gift receiver, open a joint account and transfer the down payment. These assets would then be included in the clients’ financial loan underwriting.”

Your lender will know exactly what you need to provide when you’re using gift money for a down payment. Be sure to talk with them about gift-money requirements early on in the process so you don’t unwittingly stall your closing.

Finally, the person who receives a down payment gift does not have to report the gift to the IRS or pay gift or income tax on its value, according to the IRS.