About a quarter of first-time home buyers use gifts from relatives to fund a down payment for a home purchase, according to data from the National Association of REALTORS®. But lenders are carefully scrutinizing such gifts.
“Basically, the banks want to make sure that you’re not getting a second loan,” Ray Mignone of Ray Mignone & Associates, a financial planning firm, told The New York Times. “If all of a sudden $50,000 pops into your account, they want to make sure it’s not a loan against the property that they’re going to put a mortgage on.”
In a recent article, The New York Times provided some of the following tips in making make these lenders’ checks and balances go smoother for home buyers:
- Have the money come in a check or wire transfer so that it’s traceable. Lenders often become cautious over cash gifts.
- Have the giver provide the lender with a gift letter, which verifies the money is a gift, the specific amount being given, the relationship to the borrower, and that repayment is not required.
- Deposit any gift money into the borrower’s account a few months before applying for a mortgage so the lenders have fewer questions about it, Mignone says.
- Consider federal gift-tax regulations: Individual gifts of more than $13,000 must be reported to the IRS and are subject to tax.
- Be aware that certain types of mortgages may limit how much of a down payment you can receive as a gift. For example, with conventional loans, lenders may require at least 5 percent in the borrower’s own money that is not a gift. However, Federal Housing Administration loans — which are popular among first-time home buyers — do not have any limits on gifts and borrowers can use gifts to cover the entire down payment.
Source: “To Givers of Down Payments,” The New York Times (12/27/12)