For most home buyers, financing a down payment is one of the biggest obstacles for home ownership. While there are many ways to boost your down payment, some first-time buyers may be considering using money gifted from family and friends. Before you do, make sure you know the pros and cons of using gifts for your down payment, so you don’t run into any unwelcome surprises down the road. Having the right information before you buy can help make sure that your gift from loved ones can help make your dreams of home ownership come true.
Only Certain Gifts are Eligible
While it may be wise to never look a gift horse in the mouth, it’s important to understand that only certain gifts can be used for your down payment. Gifts can only come from family members or friends who have a close relationship with you. Some specific government programs provide grants for down payment assistance and these grants are also eligible as a gift for the purposes of your down payment. However, crowd funding and “gifts” from people you don’t know who cannot prove a close relationship with you cannot be accepted by your lender as part of your down payment.
It Must be a Gift, not a Loan
One of the biggest hurdles toward this type of creative financing for a down payment is that the monies must indeed be a financial gift with no expectation to be paid back. This means that when the money is provided to the buyer, is it provided free and clear and not as a loan. This is a very important distinction when it comes to mortgage lending, so be sure that the giver completely understands that this money will never be paid back and that it is a permanent transaction.
Make it Official with a Gift Letter
Because a gift toward your down payment cannot be expected to be paid back, a gift should always come with a gift letter officially stating that the amount is indeed a gift and not a loan. Only when this legally binding document is provided can financing be considered a gift by the lender. Otherwise, this amount may be legally designated a loan, which can count toward your debt-to-income ratio when you apply for a mortgage loan.
Watch Out for Taxes
Because this financing is in the form of a gift and not a loan, your benefactor could face tax implications depending on how much they provide for your down payment. As of this year, parents of a home buyer are able to provide up to $30,000 as a gift to their children to purchase their first home, and others can gift up to $15,000. Any amount over this would be subject to gift taxes, so make sure you speak with your tax professional before accepting any financial gifts over this amount.
Before you decide how to finance your down payment, it’s important to talk to your lender to understand how much home you can afford, how much your down payment should be and more. The NC Housing Finance Agency maintains a list of participating lenders who are well versed in the NC Home Advantage suite of products. In fact, the down payment assistance offered by the NC Home Advantage Mortgage™ might mean that you may have more to put down on your home than you previously thought. Learn more about all the ways the NC Housing Finance Agency can help make your dreams of home ownership come true at www.NCHomeAdvantage.com.
