Figuring out how to buy, pay for and maintain a house can seem complicated – especially the money part. But the lucky ones don’t have to think about that overwhelming down payment money. They have family members or others who are willing to help them out.
It’s called gifting in the mortgage world. In fact, nearly 25% of first-time home buyers take cash gifts and use them for a down payment on a home, according to the 2017 National Association of REALTORS® Profile of Home Buyers and Sellers report.
“I see the gift money aspect coming back strong these days,” says Joann Perito, broker/owner of Avenues Unlimited in Arvada, Colo. “Some of the millennials can’t save because they have such big student loans even if they make good money.”
But getting gift money for down payments isn’t as easy and taking the money. Rules and regulations must be adhered to get someone to the closing of their dream home.
Here are some do’s and don’ts if you are thinking about getting a gift for your down payment.
Do get a signed statement from the gift giver
You can get help from parents or other people that care about you, but you need to get a signed statement from that giver that the money is a gift and not a third-party loan, according to the Consumer Financial Protection Bureau (CFPB). The mortgage gift letter must include the giver’s name, address and contact information; the recipient’s name and relationships to the giver; and the dollar amount and approximate date of the gift.
Don’t tell lender it’s a gift when it’s a loan
Perito has seen borrowers tell the lender their parents are giving them the money.
“But it’s not always a gift, but a loan. They expect their kids to pay it back eventually,” she says. “That can cause a problem because the lender has to take that into consideration for the debt-to-income ratio.
Do remind giver to keep paper trail
Lenders want to know that the money given matches the size in the gift letter. They also want to know that the giver isn’t emptying out their bank accounts for this gift, Perito says. They usually require two months of statements from the accounts of the giver.
Do understand the limit that can be gifted for tax reasons
Consumer Reports says that people helping out family members or friends with a down payment can give up to $14,000 to an unlimited number of people each year and still face no federal gift tax. For example, parents could each give a son and daughter-in-law $14,000. That’s $28,000 per person, or $56,000 total. That’s a big down payment.
Do get money in advance
Don’t wait until the last minute to get that check from your gift giver. It takes time to have it processed with your bank, plus the lender needs all the documentation from you and the gifting person before the closing can be scheduled.
Don’t change or add money without explanation
Your lender wants to know what is going on at all times with your money. If all of a sudden you have a $15,000 deposit with no rhyme or reason, that will send up a red flag, Perito says.
“They could be thinking that you sold marijuana for the money.”
Do understand that it takes more money than a down payment
Even though mom and pop are covering your down payment, you’re still going to need money for a lawn mower, furniture, and so many other things in the new house, she adds.
“If parents are willing, ask them to put some extra money in your account just to have it,” she says.
Don’t neglect the mortgage just because you have no money in the game
Perito has seen many circumstances where people just walked away from their house because they didn’t like the neighborhood or some other excuse. They feel because they didn’t really put any money into the down payment or closing, they won’t be losing anything.
“But they are still responsible for the more. Don’t let the lender foreclose on you. It’s not a wonderland, and you still have to maintain this biggest and best commodity you have,” she says.
Having a foreclosure on your credit history can be devastating for buying a car, getting a credit card or buying a new house for many years.
Do understand what seasoned money is
Most of the time, lenders want the last two months of bank statements. So, if you received a $10,000 gift from your sweet Aunt Mary three months ago to help you with the house, the bank probably won’t ask about it. It’s called seasoned money.
Don’t just assume it’s OK to get down payment gift
Every situation and loan are different. When you speak with your lender about what loan is best for you, make sure they understand that gift funds will be used. Some loans have strict guidelines on how much gift money you can use for a down payment or who can actually give you the money.
“The biggest hurdle for many people these days is to barely scrape up $1,000 to become a homeowner,” Perito says. “I always ask them where they will be getting money for the inspection, moving costs, and other expenses. I suggest to all my buyers to have at least $4,000 in the bank before they go buy a house.”