Homebuyers looking to a relative for a bit of help with the down payment should first consider the rules that apply to getting and using financial gifts. On a conventional loan, private mortgage insurers, lenders and even Freddie Mac still require 5 percent of the down payment to come from a borrower’s own funds, despite more generous guidelines that Fannie Mae introduced late last year allowing cash gifts to supply all of the borrower’s down payment.
Lenders and mortgage insurers, who have their own set of guidelines on top of Fannie Mae rules, want to make sure a borrower has a vested interest in the property, said Kevin Connelly, a BB&T loan officer.
There are a few exceptions to the gift rule, however, as well as ways to get around it.
Federal Housing Administration and Veterans Affairs loans, for instance, permit the entire down payment to be in the form of gifts, and conventional lenders won’t bat an eyelash if all of the money is a gift as long as the down payment is 20 percent or more.
Borrowers can even bypass the 5 percent requirement if the funds are deposited early enough. A financial windfall that was deposited months ago in buyer’s bank account is “a moot point because lenders only see the transaction activity over the past 30 to 60 days,” Connelly said.
In actuality, though, the funds should be in the account 90 days before a lender reviews finances because bank statements typically lag about a month behind the transactions they report.
“The thing that trips people up is they got the money in February but the bank statement didn’t report it until March,” said Fred Bowers, vice president of Intercoastal Mortgage.
Even when borrowers put down 5 percent from their own savings, lenders still will need the gift to meet certain stipulations before it can be used toward the down payment. The money, for instance, cannot come from a friend, a distant relative like a cousin, or any third party with an interest in the transaction, such as a Realtor or broker.
But most lenders allow parents, stepparents, grandparents, in-laws, siblings and even employers and some nonprofits to give the gift. Lenders will need a gift letter, and most have a standard form, that states the relationship between the gift giver and recipient and that no repayment is needed.
“The gift giver would be required to show that they have the money on deposit and can give the gift without borrowing,” Bowers added.
Any largesse from relatives, though, is nothing compared with the beneficence of the Internal Revenue Service, which has surprisingly generous tax rules regarding gifts. Relatives, which the IRS defines similarly as lenders, can each give up to $13,000 to a family member tax-free each year, with the combined gift from parents totaling $26,000 annually.
Gifts valued above that tax exclusion can still be made, but the donor will need to report it to the IRS, said Wendell Brown, a fee-only financial planner and tax accountant with B&E Services.
“No tax, however, is due until reportable gifts during a donor’s lifetime exceed $1 million,” he said, with the tax burden falling on the giver, not the recipient.
Gifts from an employer or nonprofit are a different matter. Although the same $13,000 tax exclusion still applies, Brown cautioned the IRS will want proof of the donation.
“Gifts from an employer are very risky for the recipient because it could be taxable as wages and income,” he said.
