When it comes to purchasing a home there are a few obstacles that a borrower may come across. The most common obstacle is being able to save for a down payment. It can be difficult for buyers to gather all of the down payment on their own but one option would be to receive a gift. If a borrower has a family member, such as a parent, who is in a position to provide assistance with their down payment, then there are a multitude of informational points and rules that both the borrower and the donor should be aware of before transferring any funds:
How much can a down payment gift be?
Typically a borrower can receive any amount of money as a gift down payment. In most cases, the entire sum of the down payment can come from a gift. This applies for all Conventional, Jumbo, FHA, and VA loans.
What are the rules and guidelines for each type of loan?
Down payment gifts can only be received by family members, the one exception is if you’re engaged and your fiance is providing the gift. In certain instances, a friend can help by gifting money but the money must be a true gift and documented properly through financial statements and a gift letter.
An important tip to be aware of before transferring any money is that the entire gift should be put into the buyer’s escrow account directly on behalf of the borrower. This will cure a lot of the issues and headaches that arise from large gift transfers from a donor’s personal bank account to that of the recipient. Due to the requirements imposed by the U.S. Patriot Act, a paper trail documenting large transfers of funds must be provided. This is done to help prevent money laundering.
In the event that a real estate transaction is canceled for any reason, the escrow officer will resend the money back to the donor immediately.
What is my next step?
Now that a donor is ready to gift funds for a down payment, the mortgage lender will assist in putting together a gift letter. A gift letter is a simple one-page document that stipulates the donor and recipient of the gift funds.
Bluefire Mortgage Group will draft and prepare the gift letter on behalf of the borrower and the donor for all mortgage transactions.
Tax Implications for Down Payment Gifts
Regardless of the gift amount, the person receiving the down payment gift will never incur any tax liabilities. If the donor the gift exceeds the annual limit it could trigger a gift tax. While Bluefire Mortgage Group does not report any gift letters to the IRS, it is important to first discuss with a tax preparer for any potential issues that may arise.
Are down payment gifts or gift letters reported to the IRS?
No. As a lender, Bluefire Mortgage Group does not report any gifts to any 3rd parties, such as the IRS. The gift letter is kept for the loan file only. It is simply used to paper trail large transfers and confirm that new repayment of the gift is expected.
Gifting of down payments is a very simple process that your mortgage lender will help you to navigate with and if done correctly, the gifting process should be fast and painless.
If you have any questions regarding down payment gifts or anything mortgage related, please give us a call at 760-930-0569.