4 Tips to Use a Down Payment Gift Correctly
Using gift funds can be an excellent way to supplement or cover the cost of your down payment since it’s not easy to save up a substantial amount of money to buy a house!
Gift funds from friends, family, or other interested parties help many buyers realize their goal of homeownership. If you’re thinking about using a gift to help with your down payment, it’s important to understand a few basics.
1. Know your Loan Program
Whether or not you’re eligible to use gift funds depends on your loan program. Some loan types allow the whole down payment to be gifted, while others require the buyer to put down a percentage of their own funds. When you’re talking with your loan officer about your specific mortgage situation, be sure to mention that you’re interested in using gift funds, so they can factor that into what type of loan you need.
2. Understand your property type
Are you purchasing a primary residence, second home, or rental property? Gift fund eligibility varies by property type. As a quick refresher, here’s what those property types mean:
- Primary residence – the address you use on your driver’s license, car registration, and voter ID. Essentially, this is the property you’d refer to as your home.
- Second-home – sometimes referred to as a “vacation home.” You must live in the house for some part of the year, and it’s usually located at least 50 miles from your primary residence.
- Rental property – this is defined as a property you rent out to tenants.
Certain loan programs don’t allow the use of gift funds for second homes and rental property purchases.
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Some loan types allow the whole down payment to be gifted, while others require the buyer to put down a percentage of their own funds.
3. Talk to a tax adviser
There could be tax implications for you or the gift fund donor, so have a conversation with a tax advisor before you get too far down the line*. It’s important for everyone involved in the transaction to have a clear idea of tax impact before the gift is complete.
*This does not constitute tax advice. Borrowers should consult their own tax advisers regarding the tax consequences and deductibility of mortgage interest and/or property taxes.
4. Document the gift properly
If you are using gift funds for a down payment, you’ll need a gift letter. Your loan officer can help you ensure your gift funds are properly documented, so you should work with them to identify what information is required. Typical information that’s requested includes: the donor’s name and contact information, donor’s relationship to the home buyer, the dollar amount of the gift, the date of the fund transfer, and a clear statement from the donor expressing that they are not expecting the funds to be repaid.
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It’s important for everyone involved in the transaction to have a clear idea of tax impact before the gift is complete.
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This article was originally published on cherrycreekmortgage.com