Using a Cash Gift for a Down Payment

Dan rafter
Written by
Dan Rafter
Read Time: 4 minutes

Can you use money from a gift to make the down payment on a mortgage? Yes, but you need to make sure you follow the proper guidelines.

Young people often receive down payment assistance from parents or other relatives when buying their first home. But it's not enough to just show up with the money and hand it over at closing. You have to be able to show it's truly a gift from a legitimate source.

Cash gifts need to be documented

For your lender, the important thing is to make sure the money is really a gift and not a loan. A loan defeats the purpose of a down payment, which is to have a portion of the home paid for up front, free and clear. If you have another loan you need to pay back on top of your home loan, it might compromise your ability to pay off the mortgage itself.

If you're using gift money, you'll need to provide your lender with a gift letter - your lender can provide the form. Signed by both the donor and recipient, it states the amount of the gift, the donor's relationship to you and that the money is a gift that will not have to be repaid. The lender may also request information on the source of the funds and the donor's financial status, to ensure it is truly a gift.

Tax guidelines

Under IRS regulations, a parent or anyone else can give you a gift of up to $13,000 per year, tax-free. If it's from both of your parents, they can give you up to $26,000. And if they have the means and are willing to include your spouse in their largesse, that rises to $52,000. That would make a pretty good down payment on a starter home.

They can give you more if they like, but then they may have to pay a gift tax on the excess. The gift tax is something the giver, not the recipient, pays. It's designed to prevent wealthy people from avoiding the estate tax by giving big chunks of their estate to their children before they die. Recipients rarely have to pay income taxes on gifts, but you may need to declare them as income if they exceed the guidelines above.

Who can the giver be?

In most cases, your lender will require that the gift be from a close relative - a parent, sibling, grandparent, first cousin, etc. In some cases you may be able to use a gift from a close friend if you can show a longstanding personal relationship. This is to help ensure the money is actually a gift and not a loan in disguise.

You also can't accept a gift from your employer, an associate or anyone else who might be giving you money as an alternative form of compensation, as the IRS would view that as an effort to evade taxes.

One thing you absolutely cannot do is accept a gift from the seller of the home. This is basically a form of kickback that lowers the true sales price of the home, so that the lender is funding more of the sales price than it was led to believe. Since banks use loan-to-value ratios to gage risk and set interest rates, this is considered a type of mortgage fraud if kept hidden from the lender and a federal crime.

Other details

On a conventional mortgage, most lenders will require that you put at least 5 percent down using your own money, separate from a gift, unless the gift is large enough to cover at least 20 percent of the purchase price. An exception is VA and FHA mortgages, which allow you to use a gift for the entire down payment.

In handling the money, you want to establish a clear paper trail in case there are any questions about the gift or its legitimacy. Deposit the full amount of the gift in your bank account or an escrow as a single transaction - don't add to or take out any money from it. The amount deposited should match the amount in the gift letter. Receiving the money in the form of a cashier's check and personally depositing it with a teller will produce paper receipts that can also be used as supporting documents.

A monetary gift toward a down payment can help you qualify for a mortgage, get a lower interest rate and, if it allows you to put at least 20 percent down, avoid paying for private mortgage insurance (PMI). If you're fortunate enough to receive such help, just make sure you follow the correct guidelines so that everything goes smoothly.

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