Gift funds allow family members to help other family members buy a home and begin to build wealth. This is something we see most often when young buyers are purchasing their first home. If you are uncomfortable with the idea of receiving a gift from family, read this blog post (not mine) about how graciously receiving a gift is your gift to the gift giver.
Conventional Financing – Fannie Mae & Freddie Mac – loans up to $453,100
Gift funds are allowed as long as they meet the guidelines specific to the loan program and structure. A borrower can receive a gift or multiple gifts as long as the gift giver is a relative. Relatives are defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or a fiancé, fiancée, or domestic partner. We most often see gifts from parents, grandparents, siblings.
- If you are making a 20% or larger down payment on a 1 to 4-unit Primary Residence or a Second Home, gift funds may cover your down payment AND your closing costs. There is no required minimum contribution from the borrower’s own funds.
- If you are making less than a 20% down payment on a 1-unit primary residence, gift funds may cover your down payment AND your closing costs. There is no required minimum contribution from the borrower’s own funds.
- If you are making less than a 20% down payment on a 2 to 4-unit Primary Residence or a Second Home, the borrower must make at least a 5% minimum contribution from the borrower’s own funds.
- Gift funds are NOT allowed for investment property.
FHA Financing – maximum loan size varies by county
- FHA loans are for the purchase of a primary residence, thus FHA loans cannot be used to purchase a second home or investment property, with one exception:
- FHA Loans will cover a 2 to 4 unit investment property as long as you can prove that one of the units will be your permanent residence.
- The minimum required down payment for an FHA loan one a 1 unit home is 3.5%. FHA rules allow that the 3.5% down payment and the closing costs can be gifted from a family member, a friend, an employer, or other approved source. These include:
- a member of the borrower’s family;
- a close friend who has a “clearly defined and documented interest” in the borrower;
- the borrower’s employer or labor union;
- a charitable organization;
- a governmental agency or public entity that has a program providing homeownership assistance to low & moderate income families; or to first-time home buyers.
Each gift giver will need to fill out and sign an individual gift letter which is also signed by the borrower. We can provide you with a template. A gift letter must state:
- The donor’s name, address and phone number
- The donor’s relationship to the client
- The dollar amount of the gift
- The date the funds were transferred
- A statement from the donor that makes it clear that the gift is not a loan and that no repayment is expected
- The donor’s signature
- The address of the property being purchased
Your fully signed gift letter must be provided along with your supporting documentation when your loan is submitted for underwriting.
For conventional financing, gifts should be wired directly to the borrower’s closing attorney and NOT given to the borrower. This can be done a few days before closing. It is still possible to use gift funds when the gift giver writes a check that a borrower then receives directly and deposits – however – a great deal more documentation is required. Please ask me about this. It is simplest to have the gift giver wire funds directly to the closing attorney. Then the closing attorney can confirm the originating account source of the wire, and then the underwriter can tie the wire back to the account listed on the gift letter.
For FHA loans, in addition to the gift letter, the person who gives you the funds will be required to provide a bank statement to show that they actually had the funds available to gift to you. So be sure to let your generous family member or friend know about this upfront.
Tax Ramifications of Gifts
The IRS imposes a gift tax on certain monetary gifts, and this tax is paid by the person gifting the money – not the gift recipient. The general rule is that any gift is a taxable gift – BUT – there are exceptions to this rule. The exceptions that would apply to gift funds used for the purchase of a home are these:
- The IRS specifies that gifts may be excluded when they “are not more than the annual exclusion for the calendar year.”
- The annual exclusion for 2018 is $15,000
- The IRS specifies that gifts to your spouse may be excluded
The $15,000 annual exclusion applies to each gift recipient. This means that if you give each of your 4 children $15,000 in 2018, the annual exclusion applies to each gift. There are no restrictions on how many people you can make gifts to each year.
There is no limit to the number of gifts a home buyer can receive. As an example, a home buyer could receive a $15,000 gift from each of 2 parents, each of 3 siblings, and each of 4 grandparents. That would be 9 different gifts.
Please do not consider this post to be tax advice. I am NOT a tax professional. You must confirm with a tax professional how your gifts may affect your tax liability.