During the past couple of years as mortgage guidelines have tightened, home buyers have had to come up with larger down payments when purchasing a home. Whether the application is for a conventional home loan or an FHA loan, banks want the home buyer to contribute more money to the purchase. Sad to say, not all buyers have the money.
This is one reason that more and more home buyers are requesting “down payment gifts” from family members. Many potential home buyers don’t want to miss their opportunity now that home prices have dropped, mortgage rates are low and a generous first-time home buyer tax credit is available.
But if a monetary gift will be in the mix for financing the purchase of your home, you should understand that there is a right way and a wrong way to proceed. So before you run out to your parents and say show me the money, it is just not possible to simply put the funds from your parents in your bank.
A three step process is involved when you accept cash for a down payment. If you fail to follow these steps precisely, it is quite likely that an underwriter will disallow the gift as a source of down payment potentially delaying closing or killing the deal altogether.
The first thing to do is to create and endorse an acceptable gift letter. While there are a number of variations of the “Down Payment Gift Letter,” the basic format is pretty much the same in each.
- States the amount of the gift
- Specifies the subject property address
- States the gifters name, address and phone
- Specifies the relationship of the gifter to the giftee
- Specifies that the gift is an actual gift and not a loan
- Endorsed and dated by all parties
If you do not have a lender gift letter I would be glad to send you one that I use for my clients. Its universal and accepted by all lenders. Just send me an email.
Once the gift letter is in place, the person making the gift should create a strong paper trail for the money that is being provided as a gift. This is one reason why it is preferable to use certified checks rather than wire transfers. While both methods are acceptable forms of gifting, a certified check provides documentation in the form of a teller receipt, making it easier to prove.
Be sure that the amount specified in the gift letter matches the amount of the actual gift.
Finally, when a giftee accepts the gift, it has to be “as is.” Make the deposit directly to a bank teller at a branch of the bank, being careful not to merge the deposit with other monies. For a gift in the amount of ten grand, for instance, you should deposit exactly that amount. That is to say, don’t add any other money to the deposit. If you follow these three steps, you should not have any problem.
In the meantime, you could face legal and tax ramifications if gifts of money are exchanged among relatives. In case you don’t know how a donation or gift receipt would affect you, remember to discuss this with your lawyer or accountant.