You’ve found the home of your dreams and you’re ready to buy. But you have a little problem: you don’t have quite enough for a down payment. The good news is you may be able to get help from a good friend or family member in the form of a gift. Here are a few things you need to know about using gift money to help with a down payment.
Gift money is more than just receiving the funds and using it for a down payment. You’ll need a “gift letter” from the person giving the money. In this gift letter, the gifter must explain the terms and conditions of the gift money, when the payment will be received and the amount of the gift money. The address of the home that you are trying to buy and the type of relationship that the gifter has with you is also needs to be clearly explained to your lender and in this letter.
This gift letter is not only a reminder, but it is also a legal binding document. If you are securing any financial assistance for your down payment, like a mortgage, then many lenders will require a thorough, comprehensive paper trail of the gift money. Bank statements, payment stubs, and receipts should all be saved for more than just a few months. These receipts will show that payment has been cleared and that the gifter has adequate funds to give the money away.
Using Brokerage Accounts and Stock. If you have a relative who is going to use their brokerage accounts to help fund a down payment, make sure that you ask them that they document it for you. It is imperative the giver has a paper trail for payments stemming from the brokerage accounts or an owner’s equity. There needs to be evidence that the funds are coming from stock sales and that it is being transferred to your bank account.
Using Gift Funds – Rules
The tax implications of the gift funds: if a prospective donor wants to give you gift funds, then it is important that you let them know that there may be tax implications. A part of the transferred amount to your bank account may be allocated to the IRS. Traditionally speaking, any monetary gift will have taxes imposed on it. Gifts to political institutions, spouses, and gifts that are less than the annual exclusion are exempt from taxes. The annual exclusion limit changes per calendar year. However, the exclusion limit is $14,000 for the years 2014 through 2016. If the gift is more than $14,000 during this window of time, then there will be tax implications.
Gifts are wonderful to receive. But before you ask for or receive a gift for your down payment please consult your mortgage lender FIRST. If you don’t have a lender we can provide several we have successfully worked with, just contact us for more information!