Over the past 2 two years, mortgage guidelines have tightened and one of the lasting impacts on home buyers is that it now takes a larger downpayment to buy a home.
It's as true for conventional home loans as it is for FHA ones -- banks want to see more of home buyer's own skin in the game.
Unfortunately, not every buyer has the cash.
This is one reason why -- anecdotally -- the number of home buyers asking for "downpayment gifts" from family members is rising. With home prices down, mortgage rates low, and a generous first-time home buyer tax credit in place, there's a lot of would-be homeowners that don't want to miss out on the action.
However, if taking a gift of downpayment is part of your upcoming home financing strategy, you need to know that there's a right way and a wrong way to do it. You can't just deposit your parents' money into a bank account.
Accepting cash for a downpayment is a 3-step process. Follow the steps to a tee, or expect an underwriter to disallow the gift as a source of downpayment.
First, complete and sign an acceptable gift letter. There are lots of variations on the "Downpayment Gift Letter" but each follows the same basic format.
- Includes the amount of the gift
- Includes the subject property address
- Includes the relationship of the gifter to the giftee
- States that the gift is actually a gift and not a loan
- Signed and dated by all parties
If you don't have a template gift letter on-hand, send me an email and I'll forward you the one I use for my clients.
Next, with the gift letter in place, the gifter should to make an extra strong paper trail for the money being gifted. This is one reason why certified checks are preferable to wire transfers. Both are acceptable methods of gifting, but certified checks are easier to document and simpler to prove -- all it takes is a teller receipt.
Make sure the amount of the gift matches the amount specified on the gift letter.
And, lastly, when receiving the gift, the giftee should be careful to accept the gift as-is. Deposit it with a live teller in a branch bank and make sure the deposit is not commingled. If the gift is for $10,000, for example, make a $10,000 deposit -- nothing more, nothing less. Don't add a random $100 check to the deposit, in other words.
Follow these 3 steps, though, and everything should be fine.
Meanwhile, there might be legal and tax liabilities when gifting funds between family members. If you're unsure about how donating or receiving a gift might impact you, be sure to talk with your attorney and/or accountant.