Down Payments as Gifts
Most home buyers say the hardest part of buying a home is saving for the down payment. As we approach the holidays, you may be in luck for getting closer to that down payment. If your parents or a relative have offered you help with this big task, there are a few things to remember about using gift money for a down payment.
Gift Amount
The amount that can be gifted from your family members usually depends on the type of loan involved. If you have a credit score of 580 or above, you can get an FHA loan with a 3.5% down payment. However, your score will determine how much you must put down and how much has to be from your own income.
If your credit score falls below 580, you may need to make a larger down payment. If your score is between 580 and 619 then 3.5% of your down payment must be from your own income. If you choose to put down 20% or more on an FHA loan, the entire down payment can be a gift. FHA loans allow gift funds to be used on primary residences only.
If you’re obtaining a Conventional Fannie Mae or Freddie Mac loan and you’re putting down 20% or less of the purchase price, the entire down payment can be a gift. However, there are some nuances when purchasing a two-unit or more property. Your loan officer at First Ohio Home Finance would be happy to help you navigate through this process.
Gift Letter
Most important in the process is the gift letter. A gift letter is required by the lender (typically a form-letter) when part or all, of your down payment is a gift. There’s a specific process for writing the letter and documenting the gift. Your loan officer at First Ohio Home Finance would be happy to help you with your letter to make sure the information included is accurate and complete.
Documentation of the Gift
After the letter, the gift itself needs to be documented. The lender may ask for a bank statement, proof of electronic fund transfer or canceled check to prove that the family member gifting your down payment has the funds to give you. Regardless of how the money is gifted, be sure to keep it separate from your other finances to keep the paper trail clean and free of complications. If possible, consult with your First Ohio Home Finance loan officer prior to obtaining the funds.
Taxes
As the receiver of this gift money, you will not be taxed for it. However, the givers of the gift need to be aware of the limits they’re allowed to give before being taxed for the amount. An individual can gift up to $15,000 while a married couple can gift up to $30,000 a year before being taxed on it.
When making the decision to receive a down payment as a gift, consider checking with your loan officer and making sure everything is planned out so your home buying experience can go as smoothly as possible.
