If you’re ready to buy a home, you’re probably thinking about how to get a downpayment. There are many financial considerations when buying a home, and a downpayment is among the first. If you have stable income, a decent credit score, and you’re managing your debt, you might already be saving for a downpayment. You might also be wondering about how to use a gift for a house downpayment. If your friends or family members are willing to help, a gift is a viable option for securing your downpayment. Before you take this route, here’s what you need to know.
How to Use a Gift for a House Downpayment
The requirements for most home loans are: a credit score of about 600, verifiable income, and a downpayment between 3% and 5% of the home purchase price. You’ll also need funds to cover closing costs, such as appraisals, underwriting fees, and inspections. You can use gifts to cover these expenses and get a jumpstart on your home purchase. To use a gift for a house downpayment, you’ll need a gift letter, which we’ll cover later in this post.
What is a Gift for a House Downpayment?
It may seem obvious, but it is important to remember that a gift and a personal loan are not the same. Though it may still be generous for a friend or family member to loan you money for a down payment, this is not a gift. If your friend or family member expects you to pay them back, this is a loan. Since this affects your debt-to-income ratio and the underwriting process for a bank loan, personal loans and gifts are counted differently when you get your home loan. This is why a gift letter will be important.
Where Can I Get a Gift?
Gift funds for a home loan can come from many different places. Most often, these gifts are from family members, though they might also come from close friends or friends of your family. This might be money your parents or grandparents have saved, wedding presents you received, or gifts from friends. This would not include an advance on your paycheck, which would instead be a type of loan, or cash payments for work you did, which would instead be a type of income.
When Do I Need a Gift Letter?
You might receive relatively small gifts from friends and family after you get married or graduate, anywhere between $50 and $500. These smaller gifts may add up and help with your downpayment, but you do not typically need a gift letter for these smaller amounts. If the gift is greater than half of your monthly income or greater than 1% of the purchase price of the home, you’ll need a gift letter to show where the money came from.
What is a Gift Letter?
A gift letter shows where you received the gift, and proves that it does not have to be paid back. When you receive the gift and you decide to use it as a part of a downpayment for your home, ask the giver to provide a gift letter. The letter should state the following:
- Giver’s name, address and contact information
- Amount given
- Recipient’s name, address and contact information
- Whether the gift will be used as a part of a downpayment
- A signed and dated statement that the gift is not a loan or income
How Much Can I Receive?
How much a friend or family member can give, as well as how much you can receive, are determined by the IRS gift tax rules. Under the gift tax rules, each individual can give another up to $15,000 a year as a monetary gift, with a maximum of $11.8 million over a lifetime. When giving and receiving gifts for a house downpayment, consult with a tax professional to determine any tax payments due.
You might have received a number of money gifts throughout your lifetime and saved them for a purchase like this. It would be difficult to track all the gifts you acquired. For this reason, any gifts you acquired more than three months prior to your purchase generally won’t require a gift letter. Money in your account for more than three months is considered “seasoned” and this can also be a good way to use a gift for a house downpayment.
Using a gift for a house downpayment can help you get the home of your dreams. Use a gift letter when needed or save your gifts in the months leading up to your home search. With the right budgeting and generous friends and family, you may be able to cover all or some of your first home downpayment.
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