Using Gift Money For A Down Payment on a Home
A typical requirement when buying a home is a down payment. The down payment amount be a small percentage of the total home cost to 20 percent depending on the type of loan you have. One way homebuyers can reduce the burden of these down payment costs is by being gifted funds. There are guidelines to follow to make sure the process is done correctly and avoid any problems with the IRS later down the line.
Gift Letters
When being gifted money, your lender will require a letter from the person giving the money to prove that it is, in fact, a gift and not a disguised loan and there is no obligation to pay the money back. There is a specific format the gift letter must follow in order to document where this money is going and what it is being used for. For this, the lender will likely give the donor a templated document that covers all legal aspects. After the letter is completed, the homebuyer and the money donor will sign the letter. In order for the donor to prove that they have these funds available, he or she will also be required to provide a bank statement.
Get the Money And Documents in Advance
Waiting until the last minute to get the gifted money is not a good idea. It can take a while for the bank to process it. Also, your lender will need to make sure all the documents are legit and the money is actually available before scheduling a closing date.
Not Everyone Can Gift Money
The gift money donor must be a family member. In some cases, godparents can also give gift money. But, the buyer must prove that there is a close relationship.
Limits for Gift Amounts
The IRS does not consider gift money as taxable. However, there are limits to the amount a family member can gift per year. One person can give up to $14,000 per year to another family member without having to report the cash gift on a tax return. Married couples can give up to $28,000 per year to other family members.
Learn more about gift giving for down payments by contacting First Ohio Home Finance!
