Many first-time home buyers receive down payment assistance from a family member or close friend, but they may not realize there are specific guidelines they must follow when they take money from others for a home purchase.
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First off, the down payment must be considered a gift. If it’s considered a loan, the lender must then factor that into the mortgage approval amount, and your buyers may then qualify for less than they may have needed to.
Your buyers will need a gift letter from the person or persons who gave them the money. The person who gifted your buyer the money will need to state on paper that he or she does not plan on asking for the money back in return and that it is, indeed, a gift.
“The gift letter is very serious,” says Casey Fleming, mortgage adviser and author of “The Loan Guide: How to Get the Best Possible Mortgage.” “While it is doubtful that a lender would ever audit a file after the fact to see if the recipient is paying the donor back, if the transaction goes bad, you might very well find yourself with a subpoena in your hand.” Remember, you cannot lie on a mortgage application. It’s a felony.
The gifter may also be required to provide bank statements, possibly even up to two months of statements from their account.
Your buyers also likely will want to get the down payment in advance during the early planning stages of their house hunt. That could also help save them from possible delays later on.
“If the funds are ‘seasoned’ — meaning that they’ve been in the account long enough so that the last two bank statements don’t show the deposit — the gift does not have to be addressed,” Fleming says.
Also, there is a limit to how much your buyer can be gifted tax-free. Any gift of $14,000 and up will face a tax bill, under current rules.
That said, “it is $14,000 per year per donor, so a couple could give $28,000 ($14,000 from each) to their child,” Fleming says.
Source: “Getting a Down Payment as a Gift? Avoid the Mistakes That Could Mess You Up,” realtor.com® (Nov. 28, 2016)