Dear Ray, 

We’ve been wanting to buy a house for several years, and with prices so low, we can definitely afford to buy this year. 

A family member is going to give us a gift of the down payment. Is there any downside for us or the person who gives us the gift? 

— K.


Giving a gift of the down payment to a family member to help them purchase a home is a growing trend. Last year, 27 percent of first-time buyers received a financial gift from relatives, up from 22 percent the prior year, according to data from the National Association of Realtors. 

While gifted down payments are becoming more popular, those who give or receive such gifts need to make sure they follow the IRS’ and banks’ gift-giving rules:

•Document the gift — This can be done in a simple gift letter. The letter should be signed and dated, and provide the giver’s name, address and telephone number. The letter should identify the giver’s relationship to the borrower. 

The most important feature of the letter is the giver must state, in writing, that the funds are a gift, and repayment is not required.

•In some cases, the borrower may still need to come up with at least a portion of the down payment on their own. For example, all loans backed by Freddie Mac require the borrower to contribute at least 5 percent of their own funds when the loan-to-value is greater than 80 percent. 

Fannie Mae is a bit more generous, allowing all the down payment funds to come from a gift on a principal residence. 

•Gifted funds that have been in your bank account longer than three months are considered “seasoned” and no gift letter is required. 

•The IRS allows an annual gift of $13,000 from a parent to a child without tax penalty; married couples, together, may give $26,000. 

You cannot deduct the value of the gift from your income tax, except in the case of a charitable contribution. (Note: There is a $5 million lifetime gift exclusion. Talk to your certified public accountant (CPA) about this.) 

•For the recipients of cash gifts, you do not need to report a gift you received to the IRS.

For any gift more than the annual $13,000 limit, the tax is paid by the giver, not the person receiving the gift. (This rule applies to cash gifts only.)

•While bank lending rules are increasingly restrictive, Federal Housing Administration (FHA) rules remains unchanged. On FHA loans, the entire down payment may be gifted, or you may borrow the down payment from a friend or relative. 

Borrowing a down payment is not allowed under other loan programs. 

•As a borrower, you must disclose any gift to your mortgage lender early in the process. Any attempt to avoid full disclosure of gifted funds constitutes mortgage fraud. 

My advice: It’s always wise to consult with a CPA or attorney specializing in tax and estate planning to understand your options, whether you are giving or receiving gifted funds.

 

Other options

For those who don’t have a rich relative willing to gift you the down payment, there are other options available to you. You can withdraw funds from your 401(K) at work and use those funds for a down payment, though you must repay the down payment over a specified period of time or risk a penalty. 

No down payment? In Seattle, there is the House Key Plus program, which provides down payment assistance through a silent second mortgage. The program allows up to $45,000 in down-payment assistance with payment deferred for 30 years, at 3-percent simple interest. 

You must be a first-time homebuyer, and the home you are purchasing must be your principal residence. The maximum purchase price is $362,790. There are other conditions, and the down payment assistance can be increased for families. 

The House Key program also offers down-payment assistance for those who are disabled and for veterans. For more information, contact Karen Carlson at the Washington Housing Finance Commission, at (206) 287-4413, or go on-line: www.wshfc.org/buyers/KeyPlusSeattle.htm.

The U.S. Department of Agriculture (USDA) offers has a very attractive zero-down loan through the USDA Rural Development program. Obviously, this loan program is targeted to rural areas. The minimum, required credit score is 640, and there is no mortgage insurance (PMI) on these loans. The seller can contribute up to 6 percent toward closing costs. 

For the most part, the FHA guidelines are applied to the USDA loans. The property must be in a USDA-eligible location. There are also income limitations. 

 

Do your homework

Most borrowers spend just a few minutes researching mortgage options, and 40 percent begin the application process with the first lender they contact — big mistake. It pays to do your homework. 

As a rule, I recommend that you talk with a mortgage representative at the bank where you have an account. You should also talk to a reputable mortgage broker; brokers typically offer a wider choice of loan products. 

Lastly, I recommend you contact a credit union or local savings-and-loan, such as BECU or Washington Federal Savings, for example. 

Also, I recommend avoiding out-of-state mortgage brokers that you find on-line; stick close to home for your mortgage. 

The first call should be to your Realtor. Most Realtors already know several reputable mortgage professionals with whom they have had positive experiences. A referral to a knowledgeable lender can save you a lot of wasted time. 

RAY AKERS has been a licensed Realtor for more than 25 years. Send your questions to ray@akerscargill.com or call (206) 722-4444.