Gifts still make great down payments
While there are no rules for helping a child pay their way through college or even contribute to their wedding, there are rules that apply when helping with the purchase of a home. I think it’s important for those potential homebuyers to be informed about the rules and restrictions.
Buyers today — specifically first-time home buyers — are often in need of a little extra help when it comes to the down payment. FHA loan programs still allow buyers to receive gifts, just not from anyone with any interest in the sale. So the generosity of family and friends can be accepted and often is appreciated as long as a few specific rules are followed.
First, the gifted funds must be “seasoned,” which means they must have been sitting in the buyer’s bank account for a few months. Each lender’s underwriter has specific time frames in which they like to see the money in the account. Your lender will tell you this and guide you as to when you should make the deposit.
Buyers need to obtain their gifts well before they plan to move into their new homes. It’s always best to find out this information well before you start shopping for a home. A lot of times, this money may be tied up in a 401(k) or mutual fund, etc. So allowing enough time for a withdrawal and deposit alleviates a lot of stress that goes with the purchase of a home.
Second, the money must be documented with a gift letter. This letter specifies the donor’s name and relationship to the home buyer, how much money was gifted and where it came from. Friends giving gift money must prove they have had a long-standing relationship with the home loan borrower.
All of this may seem like a huge invasion of privacy, but the reasoning is that lenders need to verify that the down payment money comes with no strings attached and was legally obtained.
Typically, the gift letter must be accompanied by statements of withdrawal and deposit. There is no limit on the amount of money that can be gifted from a friend or relative, and when it comes to taxes, the buyer will never be taxed on the received gift and as long as the money does not exceed $13,000 (based on 2009 IRS rules). The donor will not have to pay a gift tax either.
This is great for any first-time homebuyer simply because $13,000 covers the entire down payment on a home priced up to $370,000. The median home price here in Southern California is $270,000, as of October.