We get questions all the time from folks who want to understand WHO can give someone a gift for a down payment on a home. We also get a ton of questions about reporting Gift Funds for down payment. “Do Banks report all of these transactions to the IRS, ” I was asked this week. “What does a gift letter need to say?”
The money MUST come from someone who is not involved in the Transaction. So if your spouse is buying a house, and you are not on the contract – you can provide funds to your spouse as a gift.
Additionally, we have to document a relationship between the buyer and the person giving them a gift. This can sometimes be difficult to do with same-sex partnerships, but we’ve made it work. Gift funds can come from family, close friends (including fiancée) or an employer.
In North Carolina, we also offer a down payment program for First Time Home Buyers and folks who have not owned a principal residence for the last three years. For all of the loan programs we offer, remember that the Seller or the Realtor can not “Gift” money to the buyer.
It’s getting close to Spring, and with that there are parents thinking a nice Spring Cleaning Strategy might be to help their kids move out! If that’s the case at your house, you might need some information on Gift Funds, and especially the sometimes TEDIOUS process of documenting that gift!
Why do Lenders Care about Gift Funds? Lenders want to ensure that gift funds are not actually loans. A loan may increase a buyer’s total debt ratio (the percentage a borrower’s income of the new monthly housing payment and all other debt) beyond lending guidelines. They also want to ensure that the money is actually not an inducement for the sale. An example of such an inducement might be a seller agreeing to a higher purchase price and giving the buyer the money required for down payment.
To Accept Gift Funds as a source of down payment, the first thing a lender needs is a Gift Letter. Literally a letter stating:
I, (parent, sister, etc) of ________________ am giving them $_______ in association with the purchase of the home located at______________. This is a gift and no repayment is expected.
Now that you have your mortgage down payment gift letter written, you’ll want to make sure you don’t violate the rules of “taking a gift”. The key is for the gifter is to keep an extra-strong paper trail for the money being gifted.
This means that if you’re the one giving the gift to the home buyer, and you sell stocks as part of the down payment gifting process, make sure to document your stock sale as well as the transfer of funds from your brokerage account into the account from which you’re gifting funds to the home buyer.
Next, write a check for the exact amount specified in the gift letter — no more and no less. Photocopy the check. Keep one copy for your records and give one copy to the giftee — the lender will want to see it. Do not wire funds, if possible. It’s simpler to document and track a check — all you need is a teller receipt.
Then, for the buyer receiving the down payment gift, the funds simply need to be deposited into the ONE account that you are going to use to pay for all of your closing costs and downpayment. Do not mingle funds, because this is more difficult to verify. Make it EASY for the underwriter to see where the money came from!
Your lender will use your gift letter(s) and gift status for underwriting only; to make sure the mortgage meets underwriting standards. If you are concerned about the IRS, or any tax liabilities for giving or receiving a gift please talk to a tax accountant. All we are doing is documenting that the gift meets the FHA, USDA, Fannie or Freddie Guideline.
We do not report your gift to the IRS; it’s not the lenders responsibility to report gifts of down payments… It’s yours.