Personal Finance News: How to Avoid Down-Payment Gift Pitfalls

Personal Finance News: How to Avoid Down-Payment Gift Pitfalls

Make sure that the gift designed to get you into a house does not result in your being locked out of a home loan.

In today’s real estate market, one of the hardest parts of buying a house is getting your hands on that hefty down payment. While there are still some programs that allow for three or five percent down, many lenders are requiring consumers that have good credit to put down 10 or even 20 percent. As a result, more and more first-time buyers are resorting to gifts and personal, family-to-family loans in order to get their hands on a home of their very own. If you have in-laws, parents, or other relatives who are willing to put $20,000 or $30,000 (or more) on the line in order to help you get your own home, consider yourself lucky! Then, do a little bit of homework to make sure that the very gift that is supposed to put you in a home doesn’t keep you out of it.

For starters, make sure that money is traceable to its origins. Do not take a cash gift and deposit it in your account because cash gifts often make lenders feel leery about the source of the money. Instead, ask for the gift in the form of a check or wire transfer so that the lender knows that you did not steal or launder the windfall. Also, get your gift in advance. If you have $100 in your account one day and $50,100 the next, a lender is still going to feel very nervous about giving you a loan. If the money has been in your possession for several months, it will raise fewer red flags.

Document the amount of the gift. This is important for tax reasons since gifts in excess of $13,000 must be reported to the IRS and can be taxed, but also because some lenders will not allow you to make your entire down payment using gift money. You need to be able to show what portion of your down payment came from your loving family and what portion you contributed yourself.

Make sure that the giver is “eligible” to give you a down payment. It sounds crazy, but some lenders also are not okay with “rich uncles” or best friends giving you money to buy a house. In fact, they won’t let you use that money in some circumstances. Gifts and loans from friends, colleagues, second cousins, and business associates generally will stop a home purchase dead in its tracks.

Worried that your gift down payment will actually keep you out of your home sweet home? Don’t be distressed. Get all the information that you can about your lender’s regulations on down payments before you actually apply for the loan and work with a financial planner and finance professional to establish a scenario in which you are optimally likely to be approved for your home loan. Lenders want to loan you money, they just want to be very sure these days that they will get a good return on their investment. It is your job to make sure that your borrowing and home-buying profiles make you look like a sure thing.

Have you ever bought a home with gift money?

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