How to Handle Cash Down Payment Gifts

February 18, 2014

A cash down payment is a sum that the home buyer must deliver up front before being granted a mortgage. Accepting a cash gift from a relative is a popular way of building one’s down payment. While cash down payment gifts offer a lot of advantages, it’s important that potential borrowers understand how the source of the funds are documented. Navigating the rules around down payment gifts isn’t difficult, but it must be done correctly to avoid issues with the lender.

Understanding Down Payments

Down payments determine many things including the rate of interest on loans and the types of programs someone may be eligible for. With a 20% down payment on most primary residences, buyers often will have access to more competitive interest rates than if their loan-to-values exceeded 80%.

The rules for down payments and down payment gifts vary between lenders.  With that being said, some typical rules of thumb are:

1. Write a “Down Payment Gift Letter.”

The letter should be short and to the point, containing items such as the dollar amount of the gift, the address of the property in question, the relationship of the giver to the giftee, and a note explaining that the gift is a gift and not a loan. Be explicit that repayment is not expected. All parties should sign and date the letter. Be sure to consult with your lender about their specific requirements prior to drafting the letter.

2. Make a paper trail.

The lender will want to track every stage of this operation, so make it easy for them. The giver should document the source of the funds, and send them to the giftee in the form of a check. Checks make the process easier to follow for the bank.

3. Deposit the check.

Again, it sounds simple, but there are steps that must be followed. The giftee will likely want to make the transaction in person by walking into a bank and depositing a physical check. At this time, a borrower may not want to use an ATM or an app. Deposit the check into the account from which all the money will be drawn at closing. It’s not recommended to mix this transaction with others. Deposit the check, close the transaction, and collect a receipt. Make sure that the amount deposited is correct. Any variance may cause the lender to ask for additional documentation (which may lead to delays).

If multiple gifts are involved, each one may be subject to the same process. Do not mix transactions. Both givers and giftees should note that there may be tax implications for cash down payment gifts; these issues should be discussed in detail with an accountant prior to gifts being made.

We strongly encourage you to speak with a licensed mortgage professional serving your state. Different lenders and programs have varying requirements. Your mortgage professional can help you explore and weigh your options. You can reach eLEND by calling 800-634-8616.

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