Using Gift Money for a Down Payment
It’s that time of year again! While little ones are busy filling their holiday wish lists with Barbie dolls and Tonka trucks, consumers who are serious about buying a home in the New Year may ask relatives for a gift of money they can use as a down payment to buy a house.
It’s a rising trend for homebuyers to use gift money for part—or even all—of their down payment. In fact, according to the National Association of Realtors, 27% of first-time homebuyers in 2013 received gift funds from a relative to help make a down payment.
While using gift money is a perfectly acceptable form of down payment, there are some guidelines that need to be followed to ensure no one ends up on Uncle Sam’s naughty list.
If you plan on using gift money for your down payment, pay close attention to the guidelines below:
Document, document, document
If you plan on buying a house within the next couple of months, documentation of all gift money received is imperative. Mortgage lenders will look at your last two bank statements when considering eligibility for a mortgage, so any gifts or large deposits need to be properly documented.
Whether you’re applying for a conventional loan or an FHA loan, the documentation requirements are the same. The person who will be providing the gift of money must supply the mortgage lender with documentation, such as a bank statement, verifying where the funds are being soured from. You must also obtain a gift letter from your mortgage lender. This letter must contain your signature, as well as the signature of the donor.
It’s important to note that gift money used for a down payment must come from a legal family member. It could be a parent, grandparent or even an extended family member, so long as you can prove that the person giving you the money is a member of your extended family.
So, if you’ve been extra good this year, consider asking loved ones to help you invest in your future nest. Who knows, maybe next year you’ll be hosting the holidays in your new home!
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