The Gift of a Down Payment for the Holidays

It’s the holiday season! Your parents and grandparents want to gift you with funds to purchase your first home as your gift this year. So how does that work?

Can you just take the money and sign an offer on a house?

Well, maybe... maybe not.

When applying for a mortgage loan, the source of your down payment often is as important as the amount. Lenders look at your income, credit score and assets to determine creditworthiness. It is necessary to ascertain that you can afford the home and its associated expense: closing costs, principal, interest, property taxes, insurance, homeowner’s association fees, maintenance, and repairs. 

Underwriters want to know that large deposits into your account, other than your paycheck or regular income, belong to you outright and are not loans. If you plan to use gift money toward part or all of your down payment, it’s important to account for it correctly.

Make a list!
While gifts toward a down payment can come from various sources (family, friends, your employer), mortgage lenders need to know that the gift isn’t wrapped in contingencies. The donor needs to supply a gift letter that clarifies the money is a gift and not a loan and that it doesn’t have other strings that could negatively impact your ability to pay your mortgage and turn it into a lump of coal.

Here’s what the letter needs:

- The giver’s name, address, and contact information, including a phone number.
- Your relationship to the giver.
- The gift’s dollar value 
- A message that specifies it is a gift, not a loan requiring future payback
- The giver’s signatures
- The address of your intended purchase

Each gift needs a separate letter. FHA loans require extra paperwork and bank statements from the person gifting funds, and some mortgage companies also require additional proof, to clarify all of this information with your lender or mortgage broker before accepting the gift.

Check it twice!
Check with your CPA or tax advisor to make certain there are no tax implications with accepting the gift. Remind the giver to do the same. Having to pay a portion of the gift in taxes could derail your plans.

Wrap it up!
Keep great records of the gift. Rather than just transferring funds, request the gift in the form of a check so that you can keep copies. Deposit the check in a single transaction, by itself, with no other funds so that the paper trail is clear. If possible, deposit the funds into a separate account that you’ve set up for your down payment (a savings account will do). Get a receipt from your bank for the deposit. Make copies of all receipts, letters, and checks to give to the lender during the underwriting process.

For other ideas about how to come up with a down payment, ask! Your real estate professionals can point you in the right direction.