5 Concerns When Gifting a Down Payment on a Home

Parents, grandparents, or other family members might want to gift money to children to be used toward a down payment on a home. While this gesture often arises from the best intentions, donors and recipients should document gift funds carefully. Cash down payment gifts, when not handled properly, could trigger tax consequences or create other complications.

1. FHA Loan Approval. The FHA recognizes acceptable gifts as funds that pass from an “approved source.” They define these sources as related persons such as a child, parent, grandparent, domestic partner, spouse, sibling, aunt, uncle, or in-law of the borrower. If a non-related individual or party provides a gift, acceptable sources include a friend with a documented interest in the borrower, charitable organization, public entity, or employer. Individuals should review these requirements, along with those for conventional and VA loans, with an estate planning or tax attorney before gifting.
2. Tax. A married couple may gift up to $28,000 per year tax-free to an individual. (A single person may gift up to $14,000 annually.) Gifts at or under this amount will not have tax consequences.
3. Family loan. If the donor and recipient have an agreement that the funds provided are in fact a gift, a gift letter should be drafted and kept with one’s important records to clearly document this transfer. A bank will generally request a complete gift letter form. This document proves the funds are in fact a gift. This helps to establish that the donor is not providing a family loan to the homebuyer. If the homebuyer was acquiring a loan, that would affect their debt-to-income ratio and could disqualify them for certain home loan products.
4. Time. When a homebuyer applies for a loan, the bank generally requests financial records going back at least 60 days. As lending requirements have changed in recent years, the time frame may go back further. If a homebuyer knows in advance that they intend to purchase a home, they can coordinate gifts for the down payment in advance. Planning a year in advance is helpful, as advance planning allows more opportunity for a donor to complete multiple gifts and take advantage of the annual gift tax exclusion amount referenced above. If a homebuyer receives gifted funds less than 60 days prior to applying for a loan, having a proper gift letter available will help prevent processing delays.
5. Lost control. Once a donor gifts cash, the recipient is free to do with the funds as they please. Should the recipient elect not to purchase a house or instead (perhaps recklessly) spend the gift in other ways, the donor will have no control over the money. If the donor is concerned about a recipient’s spending habits, they can discuss trust options with an attorney. Trust provisions can help to protect assets so that they are only used for specific purposes, such as for the purchase of a home. Donors could also consider alternative gifting gestures, such as purchasing appliances, a home warranty, landscaping services, or renovation work on behalf of the homebuyers. If a donor chooses the latter, they should take care to pay the service provider directly, which will help prevent the funds from being counted towards annual gift tax exclusion.