Everything You Need to Know About Gifted Funds
Homebuyers struggling to come up with a downpayment just received some welcomed good news. The IRS announced an increase in the gift funds limit for 2023. The new limit for the year per person, per recipient, is $17,000, up from the previous $16,000. This means that a homebuyer can receive up to $17,000 as a gift from a person without having to pay taxes on the gift.
Fortunately, many lenders allow borrowers to make a down payment with gift funds. These funds, commonly known as a down payment gift, come with a few fundamental rules that you should know before accepting them. Here’s a few considerations to keep in mind when accepting a down payment gift for a mortgage, and how new homeowners should account for these funds.
Loan Program Specifics
Donor requirements vary by mortgage program. Depending on the type of mortgage you’re getting, there are different rules regarding who can provide a down payment gift to you.
For a conventional mortgage loan, the gift money must come from family. Family by blood, marriage, or legal guardianship count. Fiancés and domestic partners also count as family under this loan program.
For FHA Loans, the rules are slightly more lenient. Gifts are allowed from close friends, which could include extended family. Other sources such as employers, labor unions, and charitable organizations could count, depending on the circumstances.
USDA and VA Loans are the most lenient, with allowing for a gift from almost anyone. The one stipulation is that the individual cannot be involved in the purchase transaction.
Other Details
The amount that can be gifted is another question that commonly comes up among borrowers. In most cases, there's no cap on the amount that can be gifted, whether the money is coming from parents, grandparents, or an employer. However, the nature of the mortgage, the borrower’s credit, and the down payment amount can influence the amount gifted.
Additionally, for most loan programs the gifted funds can be used for a downpayment as well as to cover closing costs.
An Important Note
It’s worth noting that a mortgage gift cannot be repaid. The gift giver is providing funds to a home buyer with no expectation of being repaid. If the buyer is planning to pay back the funds, that money was loaned, not gifted, and the lender is required to factor that into the debt-to-income ratio.
Donors are also required to submit a gift letter to the lender. Information that should be included in this letter is a statement that the money will not be repaid, the dollar amount, the date of funds transfer, donors relationship to borrower, and contact information.
The lender will also likely require documentation showing the transfer of money for the gift. This could include bank statements of the borrower and donor, proof of wire transfer or check, and possibly a copy of the check.
In conclusion, receiving gift money for a mortgage down payment is a great way to jump-start your financial well-being when saving for homeownership. However, it's important to keep in mind the rules and restrictions surrounding down payment gifts. It’s always recommended to speak with your lender for information on acceptable donors and how to properly disclose gift funds.
