A First-Time Homebuyer’s Guide to Financial Gifts As Down Payment
What first-time home buyers SHOULD know, but often don’t, about financial gifts that help shore up down payments
There are some very strict rules when it comes to financial gifts and mortgages, but as long as you know them, there is no reason a gift can’t be utilized in your home purchase.
Oftentimes, the down payment is the primary hurdle for a first-time home buyer - it can be no small feat to shore up this capital. Let me start this response by saying that a professional lender is your best resource for discussing your options and I am not a professional lender. That said, I have some solid information from past experiences to share and I am connected to some of the best lenders in the state, whom I’d happily introduce you to should you wish to dive deeper here.
There are very strict rules around utilizing gifted funds for the purchase of a home - but the good news is, it’s definitely possible to do! Here are some of the most critical facts around financial down payment gifts >>
You may only get gift money from two different sources: a friend or family member with whom you can prove your close relationship, or from a government organization with first-time homebuyer programs (visit the Washington State Housing Finance Committee for information or speak to your lender).
There is a significant difference between a down payment gift and a down payment loan. The loan vetting process is very in-depth, and there are even more steps these days due to the pandemic and the many people with a change of job status. If your bank statements show an unexpected cash deposit, it could look suspect and loan officers can choose not to fulfill a loan if they don’t feel they have full transparency. Be upfront about your income - gifts and all.
Under no circumstance can you repay a mortgage gift. To state a sum of money was given as a gift when it is actually a loan would be considered mortgage fraud, which is illegal. Don’t do it! The banks have to calculate your debt-to-income ratio through this process, and should the gift actually be a loan, how much the bank believes you can afford would change. Be honest!
As of 2020, parents can gift a collective $30,000 per child to help with their down payment of a first-time home without incurring the gift tax. Other family members can gift up to $15,000 without incurring that same gift tax on the first-time home. Learn more about the IRS Gift Tax here >>
Gift money used for a second property or investment home is handled differently - heads up!
Pro Tips!
Season your gift money before the home buying process! If you know you’re going to receive a gift for your first-time home purchase - I suggest you get those funds in your account at least two months before you start the paperwork process with your lender. A sudden infusion of cash will get questioned as opposed to monies that have been sitting for some time.
Get a signed statement from the family member gifting you the funds, and urge them to keep a paper trail for your collective benefits down the road should the funds be questioned.
Some of the rules around gift funds change depending on your loan type (Conventional, FHA, VA, etc.) If you believe you’ll have gifted funds for your transaction, make sure your loan officer knows early so that they can factor that into the planning.
And, remember - as a first-time homebuyer, you have options when it comes to the type of mortgage you choose, which impacts how much your down payment needs to be. You can put as little as 3.5% down with an FHA loan! For context - that’s $14,000 for a home purchase of $400,000. VA Loans require no down payment!