Using gift money for a mortgage down payment requires adherence to specific rules to ensure legality and transparency.
Documentation: Lenders require a detailed paper trail to prove the legitimacy of gifted funds. This typically involves a gift letter stating the donor's relationship to the borrower, the amount of the gift, the date of the transfer, and an explicit declaration that the money is a gift and not a loan requiring repayment.
Relative Restrictions: Generally, gift money must come from a relative. Lenders consider immediate family members, such as parents, siblings, or grandparents, as acceptable sources. Some programs may extend this to close friends or significant others, but these guidelines vary.
Verification by Lender: Lenders will typically require two months of bank statements from both the donor and recipient to verify the source and transfer of funds. This helps confirm that the money hasn't been borrowed with repayment terms hidden from the lender.
Seasoning Requirements: Certain lenders require that gift funds be "seasoned," meaning they have sat in the recipient's bank account for a predefined period before use in a transaction. This is to avoid fraudulent activity or last-minute changes in financial profiles.
Limitations and Taxes: There are limitations on the amount of money that can be gifted without incurring taxes. As of recent guidelines, a giver can give up to $15,000 annually per recipient without tax implications. Amounts exceeding this threshold may require the donor to file a gift tax return.
Adhering to these rules is crucial for smooth approval of mortgage applications using gift funds. Mortgage applicants should consult with their lenders early in the process to understand all specific requirements.