How (and Why) to Give a Generous Downpayment Gift
Many people struggle to build a downpayment, causing them to avoid homeownership entirely. To help struggling loved ones and friends, some people give generous cash gifts, which can then become a borrower’s downpayment, creating an entry point to rewarding homeownership.
Giving a gift is beneficial for both the recipient and the giver. (That’s right!) But to ensure the money can be used for its intended purpose, you need to take the right steps.
The Spirit of Giving: A Downpayment Gift for Your Loved Ones
Giving Benefits the Giver Too!
We are mortgage professionals, not doctors or psychiatrists. However, we can state with confidence that giving and being generous not only benefits the recipient, it also benefits the giver in profound ways.
Multiple scientific studies support this claim. For example, an annual study from the Women’s Philanthropy Institute at Indiana University found that people who give are happier than those who do not, regardless of gender, marital status, and other factors. To be fair, this study focused on giving to charities, not downpayment gifts for relatives, but it seems reasonable to assume at least some of the benefits would carry over.
Another study, this one from researchers at Harvard and the University of British Columbia, found that you actually can buy happiness, as long as you are spending money on others. Through a detailed survey that polled over 600 Americans on spending habits and self-reported happiness, researchers discovered that as long as you are spending money on others, you are more likely to have a high level of happiness. The study took into account a test of 16 employees who received bonuses averaging $5,000. Before the bonus, people were given a happiness survey. After the bonus, they were given another happiness survey, as well as a survey on how they spent their money. People who spent their money on others, the report says, had a higher level of happiness than those who spent it on themselves. Most fascinating (and predictable) was the finding that the size of the bonus had no impact on happiness.
We could cite dozens, possible hundreds, of other studies but the results seem clear. Not only does giving benefit the receiver, it also benefits the giver. So there is plenty of motivation for giving a gift as a downpayment.
Who Can Give a Gift for a Downpayment?
A cash gift for a downpayment is an incredibly generous and thoughtful thing, one that can go well beyond the financial value of the gift. Giving $5,000 (for example) can be far more beneficial than the cash value, as it helps someone finally enter into homeownership, which can have a profound impact on their future.
But there are rules involved in giving a downpayment gift. Most important, there are restrictions on who can give a gift.
Specific details vary, but generally speaking only close family members can give downpayment gifts. For example, if you are using a loan supported by the FHA, only a few specific people or groups can give gifts. Gifts are essentially limited to a relative of the borrower, although “a close friend with a clearly defined and documented interest in the borrower” can also give a gift. Groups such as the borrower’s employer, labor union, or a charitable organization can also give downpayment gifts.
Fannie Mae goes a little deeper when defining who can give a gift. Specifically, they actually describe who counts as a “relative.” (Is a cousin’s spouse’s brother a relative?) According to Fannie Mae’s Selling Guide a gift can be given by a spouse, child, or other dependent person. It can also be “any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship.” If you are engaged to someone, you can also qualify to give a gift, and domestic partners are eligible as well.
There are restrictions on who can give a gift because it’s generally believed that most large “gifts” come with conditions; they have “strings attached” so to speak. (Although if there are strings attached, is it really a gift?) Even though the conditions need to be clarified in a gift letter, which we will describe below, lenders and institutions still want to keep the gifts to people who are less likely to hold the giver to certain conditions. Family members, it’s believed, are more likely to give a gift and expect absolutely nothing in return.
Different Loans, Different Rules
It’s important to remember that different lenders will have varying rules for giving and using a gift. While this is mostly on the recipient and borrower, givers should still be aware that how the gift is used still has implications. (It seems reasonable that because it’s your money being given, you deserve to know how it can be used.)
Various loans will have conditions for the borrower’s credit and how much of the downpayment can come from a gift. For example, if they have a high credit score they may be able to fund an entire 20% downpayment through gifts. However, if they have a low credit score, only a portion may be used for gifts.
Prepare a Gift Letter for the Recipient
If you are giving a gift for a downpayment, the recipient and borrower will likely need to prepare a “gift letter.” This letter is, for the most part, the responsibility of the borrower, but they will likely need your assistance and probably your signature. This letter will detail specific features of the gift, including the amount and when it will be given, assuming it hasn’t been given already.
Most important to lenders, you and the borrower will need to verify, in writing, that the money being given is a gift, not a loan. You’ll need to state that no repayment will be expected, and that the money comes with no conditions whatsoever.
Remember the Tax Implications
While your generosity should be applauded, don’t forget that there are tax implications for giving large gifts. Currently, if you are a single person giving a gift of $15,000 or more, you will likely trigger a gift tax, which needs to be paid by you, the giver. Parents who file taxes jointly can give up to $30,000 with no tax penalty. For this reason, many people keep their gifts below the $15,000-per-person threshold.
Giving or Receiving a Gift? We are Here to Help
Whether you are giving or receiving a gift for a downpayment, you need to work with an experienced mortgage professional to ensure the money can be used on a home loan. Contact our staff today and let use help you get the service and support you deserve.