What Happens If Someone Helps You Pay Your Down Payment? - Sometimes, the down payment on a mortgage can be a roadblock between you and your dream home – especially since it is becoming more and more difficult to qualify for a loan without putting more and more money down. Typically, lenders require 10-20% of the total loan amount for a down payment (or slightly less with an FHA loan).
Savings accounts are currently the most popular way for people to finance their down payments, but gifts are not too far behind. (In fact, 24% of first time buyers used gifts or personal loans from family members to make their down payments in 2012!) Some people are fortunate enough to have family or close friends provide the down payment as a wedding present or a gift, but there are things you need to think about if you’re going to accept this gift from a family member or friend.
It would be nice if you could just accept the gift and be on your way, but unfortunately the process is not quite that simple. Lenders want to ensure that if you are receiving a gift, it is truly a gift and not a personal loan between family or friends.
After all, if you are receiving a loan for your down payment, a lender would have to include the debt you are incurring to that family member and include it against your income or assets. In some cases, that additional debt could prevent you from qualifying for your loan altogether!
To prove that the money you are receiving is a gift and not a loan, be prepared to provide your lender with a notarized letter stating the amount of the gift, the relationship between you and that family member or friend, the size of the gift, and a written statement that the money will never have to be repaid. It’s better (and makes the process easier!) if the gift is from a close family member, such as a parent or grandparent. Unfortunately, some lenders may be hard-pressed to believe you if you got all of this money from some random, distant cousin.
And, of course, the IRS will have to get involved!
If you are receiving a gift over $13,000, the IRS requires that a gift tax be paid. You can speak to an accountant about ways to avoid this tax, such as receiving separate gifts to both you and your spouse, or to consider the gift a loan. However, the latter will still be taxable.
If you are receiving the money as a loan, or labeling it a loan to avoid the gift tax, make sure the terms of the loan are documented and you have an interest rate set for repayment. The IRS requires an interest rate and considers a loan to be taxable income. They’ll also provide their own interest rate if you don’t already have one set in writing.
If you are fortunate enough to receive your down payment in the form of a gift, it does not have to be a headache. Before you speak with a mortgage lender, make sure that the gift is properly documented and, if possible, deposited into your account long before you begin the home buying process. This will help move along the process and prevent any bumps in the road between now and the day you move into your new home!
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