Down Payment Gift Rules
The down payment gift rules are (1) the gift must be documented with a formal “gift letter”; (2) a paper trail must be shown for the gifted monies as they move from the giftor’s account to the home buyer’s account; and (3) the gift may not be a loan-in-disguise. Home buyers are permitted to accept up to 6% of a home’s purchase price in the form of a cash down payment gift.
Home Buyers Use Cash Down Payment Gifts
Receiving a cash down payment gift for the purchase of a home? Many home buyers do.
Down payment gifts can make it easier to purchase a home.
Mortgage lenders allow cash gifts for down payment on a huge array of loan programs including FHA loans, VA loans, USDA loans, conventional loans, and jumbo loans, too.
However, if you’re getting a cash gift for down payment, you’ll want to be sure that you “receive” your cash gift properly. Should you receive your gift improperly, your lender is likely to reject your home loan application.
It’s imperative, therefore, that you follow the rules of cash-gifting for a home.
“Down Payment Gifts” Are Common
It’s common for today’s U.S. buyers to receive cash down payment gifts. First-time home buyers are most likely to receive a cash gift among all buyer types, but repeat- and move-up buyers receive them, too.
The largest driver for today’s gifts of equity is the want of U.S. buyers to make a 20% down payment.
With a 20% down payment, home buyers can often qualify for the lowest mortgage rates offered by their bank; and with 20% down, there is no accompanying private mortgage insurance (PMI).
Furthermore, with 20% down, buyers can seek loans backed by Fannie Mae and Freddie Mac which, over thirty years, may be cheaper than using an FHA loan.
Mortgage loan limits cap at $417,000 nationwide except within designated “high-cost areas” where home prices exceed the national average by some multiple.
High-cost areas are determined by the government and include such cities as San Francisco and Los Angeles, California; Washington, D.C. and its surrounding counties (Montgomery, Fairfax and Loudoun); as well as New York City and San Diego.
In high-cost areas, conventional loans are capped at $625,500 for single-family homes, and multi-unit homes (i.e. 2-unit, 3-unit, 4-unit) can range to $1,202,925.
Not everyone receiving a cash gift wants to make a 20% down payment, though. Some prefer to make small down payments instead.
Low-down payment loans also allow cash gifts for down payment. For example, the FHA mortgage, which requires a 3.5% down payment allows cash gifts; and, so do the Conventional 97 mortgage and the HomeReady™ mortgage from Fannie Mae, both of which require just 3% down.
Step 1: Write Your “Downpayment Gift Letter”
When you accept a down payment gift, remember that there’s a right way and a wrong way to do it. For example, you cannot randomly deposit your cash gift into a bank account. Doing so will get your loan denied.
There’s a 3-step process when accepting a cash down payment gift and no matter what your loan type — Conventional, FHA, VA, or other — the 3-step process is the same.
Follow the rules to the letter.
First, write a gift letter that follows the includes the following information :
- The amount of the gift
- The subject property address
- The relationship of the gifter to the giftee
- A note that the gift is actually a gift and not a loan and will not be repaid
The gift letter should be only as long as needed and should not contain “extra” information. Have all parties sign and date the letter. Set the letter aside — you’ll come back to it in the section below.
Step 2: Document The Gift From The Giftor
With your mortgage down payment gift letter written, you’ll want to make sure you don’t violate the rules of “taking a gift”. In order to do that, make sure to keep an extra-strong paper trail for the money being gifted.
If you are the person who is gifting funds to the buyer, for example, and you sell your personal stock holding as part of the down payment gift process, you will want to make sure that you document the sale of your stock as well as the transfer of funds from your brokerage account into the account from which you’re making the gift.
Do not make the transfer without a proper paper trail.
Next, you’ll want to write a check to the home buyer for the exact dollar amount specified in the gift letter you’ve written. Photocopy the check. Keep one copy for your records and give one copy to the buyer — the lender will want to see it as part of the process.
Note that writing a check is will require more steps and will require more effort than simply wiring funds to the buyer. Be okay with these extra steps. It’s simpler for a lender to document and track a personal check than it is to track a wire; and it’s good to make things simple for the bank.
Step 3: Document Receipt Of The Down Payment Gift
Now that the gifter has handed, in the form of a check, a down payment gift to the buyer, the following steps are required.
First, with the gift check in hand, the buyer should physically walk into a preferred depository bank (e.g.; Wells Fargo, Bank of America, Chase, Huntington) to make the deposit in-person.
Do not deposit the check online using an iPhone or Android app; or at an ATM machine.
In addition, into whichever bank account you deposit your gift money, make sure it’s the same bank account from which all of your money at closing will be drawn. You do not want to bring money to closing from multiple savings accounts. This, too, can complicate your paperwork for the lender at a time when your goal is to keep things simple.
When you get to your branch, then, do the following :
- Deposit the gift funds into a bank account
- End your transaction
- Collect a receipt for your deposit
Under no circumstances whatsoever should you “co-mingle” your gift deposit with other monies, nor with other gifts. The amount specified on your teller receipt should match exactly the dollar amount on the certified down payment gift letter.
If the amount is off by even a penny, the lender will likely reject your letter and the funds that came with it.
Note that if you are receiving multiple cash gifts for down payment, you should follow this process for each gift independently. Again, do not co-mingle your gifts. Be guided by your gift letter.