Posted 2 years, 1 month ago

Coming up with the necessary funds to cover down payment and closing costs can be a challenge for some home-buyers. The good news is that many loan programs allow the use of gift funds to help with a home purchase. If you are going to talk with someone close to you about receiving a gift, there are some general rules that you and your “gift donor” need to know. Gifting guidelines are based on several factors (i.e. loan program, property type, occupancy type, down payment). We encourage you to call us to learn how gift funds can be used with your specific transaction, but here is a general overview.

Acceptable Donors

A direct relative (spouse, child, other dependent or individual related by blood, marriage, adoption, legal guardianship)

  • A fiancé, fiancée or domestic partner
  • Cannot be affiliated with an interested third party to the transaction

Gift Letter

We will require a gift letter from the donor. The letter will need to include the donor’s name and contact information, dollar amount of the gift, and also must state that the funds are a gift with NO TERMS OF REPAYMENT. We have a template letter for you to use.  Additionally, we will need to document the transfer of the gift funds from the donor to you.

Allowable Occupancy Types

Your loan type and occupancy type will determine whether gift funds can be used.

  • Conforming: Gift funds allowed only for Primary Residence or Second Home (NOT allowed for Investment Properties).
  • FHA and VA: Gift funds allowed only for Primary Residence.
  • Jumbo: Gift funds allowed only for Primary Residence, or second home.

How Much Can Be Gifted?

The actual amount that can be gifted will vary dependent on which type of mortgage you plan to obtain (i.e. Conventional Conforming, High Balance Conforming, FHA, VA, Jumbo). 

  • Conforming: The general rule is that lenders will allow for all funds for the transaction to come as a gift if the borrower is making a down payment equal or greater to 20 percent of the purchase price. 
  • FHA and VA: The entire amount for down payment and closing costs can be gifted.
  • Jumbo: Lenders typically require that a minimum 5% of purchase price come from the borrower’s own funds.  Once the first 5% of the borrower’s own funds are verified, a gift can be used for the remaining down payment and closing costs.

Tax Implications

It’s important to note that the donor may be required to pay taxes for any gift funds that exceed the maximum allowable under the IRS tax code.  Be sure to speak with a tax professional to determine any potential tax liabilities.

The use of gift funds can be a great way to help obtain the home of your dream, but several factors are considered in determining whether they can be used and how much is allowable.  Please contact us today to learn more about gift funds and how they might work for your specific transaction.

-The Kavanewsky Team