Did Santa bring you the cash for a down payment on a home this year? Lucky you! That’s a fantastic gift to receive. However, you must be aware of certain requirements that need to be followed when you’re using a gift of cash as your down payment on a house. If you find yourself in this enviable position, then here’s what you need to know to make sure you’re within the guidelines.
Who played Santa?
Unfortunately, most lenders won’t recognize “Santa” as a legitimate giver of cash for a down payment. In fact, most lenders have limitations on who can give a gift of cash to use for a home purchase. If you’re getting an FHA loan, then you’ll have some wiggle room. The gift can come from family, close friends, your labor union, or even your employer (where can we find that job?). For conventional loans, there are more restrictions. In these cases, the gift usually needs to come from a parent, grandparent, sibling, spouse, or the person to whom you are engaged.
Get a letter
The cash for your down payment didn’t just appear out of thin air, so you’ll need to document where it came from. You’ll need to obtain a gift letter from the person who gave you the money. The letter needs to state their relationship to you, the amount of the gift, and the address of the home. It also needs to clearly state that the gift is not a loan. Lenders want to be assured that you will have the means to pay back your home loan.
Create a paper trail
The money for the down payment needs to be properly deposited in your account in order to create a paper trail. First of all, the person giving you the money needs to write a check for the exact amount of the deposit. You will then need to take this check to the bank and deposit it in person to the account you will use for the closing. Do not make any other deposits at this time. And be sure to get a receipt!
Get additional documents
You can never have too many documents when it comes to verifying where your monetary gift came from. If possible, get bank statements from the giver’s account. If the money came from the sale of stocks or it was a transfer from a brokerage account, then get those documents as well. Save any paperwork that is applicable – you never know what you may need down the line. It’s best to cover all your bases.
Pay your taxes
You didn’t think that gift money was going to be tax-free, did you? Uncle Sam will want a piece of this transaction. The gift giver usually pays the taxes. However, if both parties are in agreement, the person who received the gift can be on the hook for the taxes, instead. If you have any questions about what taxes need to be paid and by whom, talk to a professional tax accountant.
