Don't gift a down payment without doing these things first!
Buying a home is an expensive process, with affording the down payment definitely being the most difficult part financially. If you have a friend or family member in such a situation and you're interested in helping them out, that can make a huge difference in the home buying process.
However, unfortunately, gifting someone money for a down payment isn't quite so simple as writing them a check. There are a few other things you'll need to do to ensure that the money is able to be used for the home's down payment and that you're following all of the proper legal processes along the way.
#1 Write A Gift Letter
The first thing you'll need to do when giving someone money for their down payment is writing a gift letter. This is a letter than the buyer will need to take to their lender, and basically it's just making sure the bank can verify that this is a gift and not a loan.
You see, if you were loaning your friend the money, your friend would have to pay you back. The bank would need to know this so that they can calculate the monthly loan payment and its interest into your friend's debt-to-income ratio. That's a complex process and it can affect your friend's ability to qualify.
By writing a gift letter, you're basically just confirming for all parties that this truly is a gift and you do not expect repayment.
#2 Provide A Bank Statement
When going through the income verification process, the bank is going to be wanting to trace all large deposits and figuring out exactly where their money is coming from. To help your friend through the process, you may be required to provide a bank statement that shows the money being debited from your account. Your friend will then show a statement with the amount being credited into their account.
This helps the bank verify that you really were the person providing them with the gifted funds and that it did not come from a third-party source, such as a personal loan company or somebody who is going to expect repayment for it at some point.
#3 Consider The Tax Implications
Nope, giving a gift isn't free. You should speak with your tax accountant or financial advisor to determine the tax implications of the gifted funds. You will likely owe taxes on the full amount, but how much you owe will vary depending on where you reside and just how much money you gave your friend to begin with.
Be sure to ask your tax advisor how to report the gift at the end of the year and when you should expect to pay the taxes you owe. Should you pay them now or at the end of the year when you file your return? How should you report the gift? These are important questions that could cost you big time if they aren't addressed properly, so don't overlook this part of the gifting process either.
Our loan experts at Horizon Lending Services are equipped and ready to help you with any of your financial needs. Contact us today for any questions you may have about gifting a down payment for a home loan.
