The Gift of a New Home
With the holidays quickly approaching, and with the buyer tax credit program extension, this winter may be the perfect time to help a loved one buy his or her first home. Gifts can be used towards down payments, as long as it is done correctly. Here’s what you need to know before writing that check.
Banks are more cautious now than ever about who they lend money to, especially when it comes to mortgage loans. They want to make sure that, not only does the buyer have enough money for a down payment, they also have the means to keep making payments. Because of that, a majority of the money raised for a down payment needs to come from the home buyer alone. This amount varies based on the amount of the loan, the creditworthiness of the applicant, and the lender.
Once you have determined how much you can give, you will need to write out a gift letter. The actual requirements of this letter can change depending on the lender, but most require five things:
- The amount of the gift
- The address of the home being purchased
- A sentence or two stating that the money is a gift, not a loan, and does not need to be repaid
- Your relationship to the home buyer
- The date and signature of all involved parties
This letter provides some of the documentation the bank needs to allow the money to be used for a down payment. However, there may be many more requirements you will need to meet in order for the buyer to use the money as you intend.
The buyer will probably have to present a copy of the check, front and back, when applying for the loan. Some lenders also require a copy of your financial statements, showing that the money did, in fact, come from your bank account.
This is a lot of work just to give someone a gift towards the purchase of their first home. Is there a way around all of this? Not really. If you’re concerned about these requirements, you can give your loved one the money well in advance of the home purchase, by three months or more. Most lenders will only require documentation of any money received within the most recent two or three months, so any money that is already in the account isn’t questioned.