Buying a home is an exciting milestone in many people’s lives. However, saving up enough cash for a down payment can be challenging, especially for first-time homebuyers. If you’re hoping to buy a home soon but are falling short on your down payment funds, you may be wondering if you can receive a monetary gift to put toward your down payment. Here’s what you need to know about down payment gift rules and requirements.
Can you use a gift for a down payment?
Yes, it is perfectly legal to use funds gifted to you from a relative, friend, or anyone else as part or all of your down payment on a home. There are no federal regulations prohibiting homebuyers from using gifted funds toward their down payment and closing costs.
Gift funds can make it possible to buy a home sooner if you haven’t been able to save enough for the down payment on your own. Receiving funds as a gift rather than a loan also means you won’t have to repay the amount later.
Are there any limits on down payment gift amounts?
There are no federal limits on how much of your down payment can come from gifted funds. The full amount of your required down payment can potentially come from a gift or gifts.
However, mortgage lenders may set their own requirements on how much of your down payment can come from a gift. Many conventional lenders allow your entire down payment to come from gift funds as long as you also meet the minimum borrower contribution requirements.
FHA loans require at least 3.5% of the down payment come from your own funds even if receiving a gift. VA loans have no minimum borrower contribution requirements for receiving gift funds.
Do I have to pay taxes on down payment gift funds?
You do not have to pay any taxes or claim down payment gifts as income. The person giving you the gift funds may have to file a gift tax return if the amount exceeds annual gift tax exclusion limits, but you as the recipient have no tax obligations.
The annual federal gift tax exclusion amount for 2022 is $16,000 per individual recipient. This means an individual can give up to $16,000 to as many people as they want each year without having to file a gift tax return.
If the gift giver exceeds the $16,000 annual exclusion amount for any single gift recipient, they must file a Form 709 gift tax return. However, no gift taxes are owed until the lifetime exclusion amount of $12.06 million is exceeded.
What documentation is required for down payment gift funds?
To use gift funds for a mortgage down payment, you’ll need to document and disclose where the funds are coming from. Here are some common requirements:
- A gift letter signed by you and the gift giver stating the amount of funds gifted and that no repayment is expected
- Proof of the gift giver’s ability to provide the gift funds, such as a bank statement
- Evidence of the gift transfer, such as a wire transfer record, cashier’s check, or other documentation
Providing clear documentation helps show the gift giver has the means to provide the funds and that the transaction is not an undisclosed loan that needs to be repaid. Specific documentation requirements may vary by lender.
Are there any risks or drawbacks to using down payment gift funds?
While using gifted funds for a down payment has many benefits, there are a few potential drawbacks to consider as well:
- You may miss out on down payment assistance programs that require the funds to come from your own savings.
- If not properly documented, the funds could be misconstrued as an undisclosed loan.
- You have less of your own “skin in the game” and equity built up in the home from the start.
- The gift could potentially strain your relationship with the gift giver if not handled carefully.
As long as you fully disclose and document the gift to avoid issues, using funds gifted to you can be an excellent way for first-time homebuyers to achieve homeownership sooner.
Who can gift you money for a down payment?
Down payment gift funds can come from any individual donor, including:
- Relatives – Parents, grandparents, siblings, aunts/uncles, cousins, etc.
- Your spouse or future spouse
- Friends or co-workers
- Your employer
- Charities/non-profits providing down payment assistance grants
- Any other individual gift giver
One common source of down payment gift funds is from parents helping their children buy their first home. First-time homebuyers who don’t have enough savings of their own often receive down payment support from their parents.
Gifts can also come from multiple donors. For example, you could receive separate gift funds from both your parents and grandparents that together add up to your full down payment amount.
Can the seller give you a gift for the down payment?
While the seller technically can provide gift funds toward the buyer’s down payment, this is frowned upon by most lenders. There would be concerns about inflating the purchase price and not actually gifting the funds.
There could also be potential conflict of interest issues when the seller is contributing toward the buyer’s down payment. Some mortgage loan programs explicitly prohibit the seller from providing gift funds.
If receiving a gift from the seller, the transaction would need to be thoroughly documented and disclosed to show it’s a true gift without other complications or obligations involved.
Can your employer give you money for a down payment?
Yes, some employers may choose to give employees money to help with a home purchase, which can be used for the down payment and closing costs. This can be an especially helpful benefit for teachers, police officers, firefighters, and other public service workers.
The down payment assistance may be structured as an outright gift or a forgivable loan that you repay by working for the employer for a certain number of years. The funds need to be properly documented as either a gift or a secondary financing arrangement.
Do down payment gifts affect your tax returns?
Receiving a gift to help with your mortgage down payment has no effect on your income taxes as the recipient. You do not report the gift funds as income or pay any taxes on the amount.
The only potential tax implications are for the gift giver. If the gift exceeds the annual exclusion amount of $16,000 for a single recipient, the gift giver must file Form 709 to report the gift to the IRS but does not owe gift taxes until lifetime exclusions are exceeded.
You may need to include documentation of the down payment gift on your loan application. But the gift itself does not get reported on your tax return or cause you any tax liability.
Are down payment gifts reported to the IRS?
You as the gift recipient have no requirement to report a down payment gift to the IRS or include it on your tax return. As the down payment gift recipient, the funds are completely tax-free to you.
The responsibility to report large gifts to the IRS falls on the gift giver only. Any individual can give up to $16,000 annually to an unlimited number of recipients without reporting. Gifts exceeding $16,000 to a single recipient in one year must be reported on IRS Form 709 by the gift giver.
The gift will not affect the giver’s taxes owed unless the lifetime gift exclusion amount of over $12 million is exceeded. So most down payment gifts do not incur any actual gift taxes or IRS liability.
What if you don’t report a down payment gift to the IRS?
Since down payment gift recipients have no obligation to report the gift to the IRS, there are no consequences or risk of penalties for the recipient if the gift is not reported.
For the gift giver, not reporting a gift exceeding the annual exclusion amount on Form 709 is considered tax evasion. If discovered, the IRS may assess back taxes, interest, and penalties.
But in reality, moderate down payment gifts are rarely subject to audit or IRS enforcement. As long as taxes would not actually be owed on the gift, there is little risk to the gift giver for not filing Form 709.
How do you document gift funds for mortgage lenders?
To satisfy mortgage lenders, you’ll need to document any down payment funds coming as gifts. Here are some tips:
- Have the gift giver provide a gift letter stating the amount and confirming it does not need to be repaid
- Show proof of the gift giver’s ability to provide the funds, such as bank statements
- Document the transfer of funds via wire transfer, cashier’s check, money order, etc. Provide a paper trail
- Have your mortgage lender review gift documentation early in the process to ensure it will be acceptable
Providing clear and compliant documentation avoids delays and shows the gift giver has the means to provide the down payment gift.
Can you repay a down payment gift after closing?
Technically you can repay a down payment gift after closing, but this violates the spirit of the gift letter, and triggers IRS implications.
If funds are truly a gift with no obligation to be repaid, they cannot suddenly become a loan after the fact. Doing so essentially makes the original gift letter fraudulent.
Additionally, down payment gifts over the annual exclusion amount should have been reported on Form 709 if they were expected to be repaid like a loan.
While accidentally repaying a small gift may not prompt IRS action, directly contradicting the terms of the original gift letter through repayment is ill-advised.
Is a down payment gift letter legally binding?
While a down payment gift letter is not the same as a legally enforceable contract, it does carry important legal and tax implications that should be followed.
The gift letter confirms that the transferred funds are truly a gift with no expectation of repayment or strings attached. This has meaning for tax reporting requirements.
Additionally, misrepresenting a loan as a gift constitutes mortgage fraud. The gift letter needs to accurately reflect the true nature of the funds provided.
So while not an actual contract, the gift letter is a legal document representing facts that should not be contradicted later. Most mortgage lenders require gift letters for this reason.
Can the gift giver change their mind and ask for repayment?
Demanding repayment of a supposed gift essentially invalidates the original gift letter. The funds were either a gift or a loan upfront, not both.
Legally, the gift giver cannot compel repayment if the original documentation shows the funds were gifted without strings attached. Doing so contradicts the facts represented in the gift letter.
However, asking nicely for repayment is different than demanding it. If cash flow allows, the recipient may opt to voluntarily repay some or all of a down payment gift as a gesture of gratitude.
How does a down payment gift affect your mortgage?
A down payment gift can enable you to qualify for a mortgage and buy a home sooner. However, a mortgage based heavily on gift funds differs from one using your own savings in a few ways:
- Mortgage rates may be slightly higher due to lower down payment contribution
- Mortgage insurance requirements may be higher with less equity invested
- Debt-to-income ratios are higher as the mortgage makes up more of your monthly obligations
- You may not qualify for special mortgage programs targeting high saver contributions
That said, a mortgage is very doable even with a gifted down payment if you still meet debt-to-income and credit requirements.
Do I need to deposit a down payment gift into my bank account?
You do not necessarily need to deposit gift funds into your personal bank account. It may be easier to document the down payment trail if the gift giver wires funds directly to your real estate attorney’s escrow account.
Some mortgage lenders require bank statement reserves even when bringing a down payment gift. In that case, you would need to briefly deposit the amount into an account under your name.
The key is the mortgage company needs to document the funds originated from the gift giver’s account and were under your control at some point.
Should you ask for a down payment gift?
It is perfectly acceptable to ask close family members for down payment assistance if you are falling short of savings goals. But be sensitive in your approach.
Consider the gift giver’s financial situation and relationship dynamics before asking. Make it clear there is no pressure or obligations. Do not assume support.
Asking for a small contribution is better than expecting someone to fully fund your down payment. Make sure mutual expectations are clear before accepting large gift funds.
Is a down payment gift worth it?
For prospective homebuyers without enough of their own savings, a down payment gift can definitely be worth it. A gift enables you to achieve homeownership years sooner.
However, make sure you are ready for the responsibilities of homeownership before relying heavily on gift funds. Also carefully weigh relationship dynamics before accepting extremely large gifts.
For most, moderate down payment gifts from family who are able and willing are an incredible opportunity to stop renting sooner.
Conclusion
Using funds gifted to you from relatives, friends, or others can be a huge help in covering your down payment and closing costs to purchase a home sooner. Just make sure any gift funds are clearly documented as gifts rather than undisclosed loans to avoid headaches. For prospective homebuyers who’ve struggled to save enough on their own, down payment gift funds can make homeownership dreams a reality much faster.
