How To Use Gifted Funds For A Mortgage Down Payment
Buying a home with little to no money down has become much easier these days. First of all, there are great no money down home loan programs. These include VA home loans, USDA loans, and down payment assistance programs, but even if a down payment is required, an allowed source may provide the down payment in the form of a gift. Technically, gift funds allow even more ways to buy a home without using his/her funds. Unlike traditional gifts, there are specific requirements for gifts during the home loan process. One of the most important requirements includes the gift letter for mortgage loans.
Gift Letter for Mortgage
If a gift is involved in a purchase, mortgage lenders will require a gift letter. Not only is a gift letter required, but there are also specific requirements. Even though the format normally does not matter, it is best to use the standard gift letter template. Most lenders use practically the same gift letter format. Either way, a gift letter must include the following information:
- Donor name, address, and phone number
- Donor relationship to the borrower
- Amount of the gift
- A statement that no repayment is required
- Donor and borrower signatures with date
Below is a sample gift letter for mortgage pdf.
Gift Letter for Mortgage Warnings
Using a gift letter sounds like an easy solution. Just have someone sign a letter, hand over gift funds, and close on the purchase. Not so fast! There are rules to follow so no one gets in trouble.
- Read the warning at the bottom of the sample gift letter
- Gift funds may not be a loan to the borrower
- Verify if the gift is a taxable event
- Follow loan program specific gift documentation requirements
Gift Letter Warning Statement
The statement warns all parties involved that providing false information has steep penalties. Providing false information includes penalties of up to $5,000 fines, two years of prison, or both. False information includes stating the funds are a gift, but they are really a loan. If the funds are a loan, then indicate that they are a loan. Discuss it with your loan officer as it may be allowed. Another form of fraud includes routing funds from the seller through the donor and then the buyer. If a gift is coming from an authorized source, it needs to come from the donor (not an interested party like the seller or builder). While on the topic of what not to do, check out another article which describes the 10 most common forms of mortgage fraud.
Know the Gift Tax Limit
The IRS defines a gift as “Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.” Each year, the Internal Revenue Service sets a gift tax limit so that gifts under the threshold are not taxable. For 2019, the gift tax limit is $15,000. If a home purchase involves gift funds, it is important to consult a professional tax adviser to make sure that the gift does not create a taxable event. If it does create a taxable event, at least the donor understands the potential tax liability. Then, the gift is or is not made as an informed decision.
OVM Financial, Inc does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your tax, legal and accounting advisers before engaging in any transaction.
Know the Gift Funds Requirements
Depending on the home loan type, gift funds guidelines vary. Some loans such as FHA and USDA require proof of the actual transfer of funds from the donor to the borrower. Furthermore, the donor must prove the source of the gift funds. A primary purpose is to ensure an interested party to the sale is not providing the down payment funds. Although, other loan types such as a conventional loan or VA loan are not as strict. Either way, buyers and donors should always follow the rules mentioned earlier.
So, the best piece of advice is to discuss the mortgage loan thoroughly with your loan officer. Additionally, discuss specific gift funds requirements. One of these requirements will always be completing the gift letter for mortgage correctly. Plus, never transfer gift funds until this discussion has taken place. It could avoid potential issues later in the process.
