Most home buyers need to make a down payment when they purchase a home. If someone gifts you some of that money, it's called a down payment gift. You can use it to pay some or all of the down payment. There are rules about who can make a down payment gift and how much of the down payment can be gifted. Below, we'll cover all the details you need to know about down payment gifts.
A down payment gift is money someone gives a home buyer towards their down payment.
There are strict rules for down payment gifts. The rules vary by loan type. Rules exist to help ensure borrowers can afford the expenses of homeownership. Your mortgage lender must confirm the money really is a gift, not a loan. Otherwise, you (the borrower) would have an additional financial obligation -- repaying the loan -- that could affect your ability to make mortgage payments.
Down payment gift rules cover two main areas: Who can provide the gifted funds, and how much of the down payment can be gifted. You'll also need to prove the money is a gift, not a loan.
Here are the rules for down payment gifts on conventional loans:
Most conventional mortgage lenders prefer 20% down. Buyers who put less than 20% down typically must buy private mortgage insurance to protect lenders. Still, 10% down payments are common. And some lenders even allow just 3% down.
Here are the rules for down payment gifts on FHA mortgages:
FHA mortgages are guaranteed by the Federal Housing Administration. If you have a credit score of 580 or higher, the minimum down payment is 3.5%. If your credit score is between 500 and 580, you'll need to put 10% down. Mortgage insurance is typically required on FHA loans.
VA lenders do not require down payments or mortgage insurance. If you receive a down payment gift, you could put the money towards the home and borrow less. Or the gift might go towards closing costs.
Here are the VA rules for down payment gifts:
USDA loans don't require a down payment if you meet certain income criteria. Note that you will owe mortgage insurance on USDA Loans, which will increase your monthly payment. As with a VA loan, you may still wish to receive a gift to cover closing costs or reduce your loan balance.
Here are the rules for down payment gifts on USDA mortgages:
A down payment gift letter proves the down payment gift actually is a legitimate gift and there's no expectation of repayment. This is required by mortgage lenders. The mortgage gift letter must be dated and signed by both the giver and the recipient. It should include:
Home buyers receiving a down payment gift must show they received the gifted funds and where they came from. There are several ways to prove this including:
Your down payment gift money is unlikely to be taxed, but you might have to declare it. Anyone can provide a gift -- including a down payment gift -- of up to $15,000 to any other person without any tax consequences.
This $15,000 is per gifter and per recipient. Let's say you're married and your parents want to help you buy a home. Your mother could give $15,000 to you and $15,000 to your spouse. Your father could do the same. That means up to $60,000 could be transferred with no tax consequences.
Gifts above this $15,000 threshold must be reported to the IRS. However, every person has a lifetime gift exclusion of money they can receive before taxes are owed. The exact threshold in 2021 is $11.7 million. As a result, most people will not owe taxes on gifts they provide.
If down payment gift money is not available, alternatives include:
If you're a first-time home buyer, our experts have combed through the top lenders to find the ones that work best for those who are buying their first home. Some of these lenders we've even used ourselves!
We've compiled a first-time home buying guides to help you confidently take the next step to land your best mortgage deal. Check out The Ascent's first-time home buyers guide for essential education.
The rules for down payment gifts vary by loan type. With VA, USDA, and FHA loans, almost anyone can provide a down payment gift. This can include close family members, employers, labor unions, and charitable organizations. Only interested parties, such as real estate agents, may not be able to make a gift.
Conventional loans have stricter rules. Generally, only spouses, domestic partners, fiances, or other relatives can provide gifts. Relatives can include people related by blood, marriage, or guardianship.
In most cases, you can use a down payment gift for up to 100% of the amount. However, it may be different if you are buying a second home or a multi-unit property with a conventional mortgage loan. In this case, if you put less than 20% down, you'll need to provide at least 5% of your down payment from your own funds.
A down payment gift letter should include the property address and personal details about both the gifter and recipient. The down payment gift letter should specify the amount of money and transfer method. Most importantly, it should make it clear the money is a gift, not a loan, and that there is no expectation of repayment.
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