Don’t make these mistakes with money you are gifted for a home. One of the most important things for a home buyer to prepare for is the down payment on a mortgage.
Some home buyers may be fortunate enough to be receiving monetary gifts this holiday season to put towards there home.
With gift money, there are a few things to keep in mind to ensure the mortgage process goes smoothly.
Home buyers should take care not to make the following mistakes.
Mistake #1: Not Documenting The Gift
A large amount of money that has been given to a home buyer (giftee) as a gift for a down payment, must be documented in a specific way. The correct way to do this is in what lenders call a gift letter.
This letter is a simple document drafted by the home buyer that lists:
- exact gift amount
- explanation that the gift is indeed a gift and not a loan to be repaid
- property address
- date of gift transaction
- relationship of the gifter to the giftee
- both of their signatures
This document is given to the lender. If anticipating a gift or upon receiving one, always communicate with your lender, they may have their own specifications to be included in the gift letter.
Bonus! Kyle Hiscock (Rochester, NY Realtor) has put together some great ways to save for a down payment.
Mistake #2: Not Keeping Records of The Gift Transactions
Part of the mortgage process is the underwriting. Underwriters go through all of the buyer’s financial accounts.
One way to raise a red flag is to have a large deposit made that is anything other than a normal monthly deposit like a paycheck. This is exactly why a lender needs a gift letter. It explains why a large deposit exists and if it needs to be repaid.
The goal is to ensure the borrower/home buyer has the income and financial means necessary to take on a mortgage. Keeping exact records of this gift transaction are very important for the giftee as underwriters are very detailed in their research.
Bank receipts, transfers to accounts and any other pertinent record tracking of the transaction need to be submitted to the lender.
Note: Each type of mortgage (Conventional, FHA, VA) has its own rules as to what is considered a large deposit. Lenders can help with this information.
Mistake #3: Too Many Deposits In Different Accounts
Another mistake a buyer can make is depositing the gift money into an account different than the account that they will be using to pay closing costs.
Lenders prefer all money towards the mortgage, both down payment money and closing costs, be in the same account.
Another thing to note is if a buyer receives more than one gift payment, each needs to be deposited separately and into the same account.
The less work an underwriter has to do to connect the dots of a gift transaction, the better.
Bonus! Just Close has written an informative article on all there is to know about closing costs!
Mistake #4: Poor Communication with Gifters
Gifters are extremely generous and part of being grateful to them is ensuring they too have all the information that they need to make the process smooth on their end.
Some lenders will want proof of a gifter’s entire gift transaction. They will want to see where exactly the gifter’s money comes from and all the transfer records that are completed until deposited in the giftee’s account.
There are also tax implications in some cases for gifters. Larger amounts may be subject to a gift tax. Gifters should contact their accountant on the most recent IRS gift tax information.
Bonus! Karen Highland (MD Realtor) gives us great article on tax deductions for homeowners.
Giving the gift of a down payment for a home is probably among the most generous things you can do. If you are the recipient of the gift money, you want to be able to use it, right?
Be sure to avoid these mistakes to steer clear of closing delays and unnecessary stress if you are the recipient of down payment gift money.
More Home Buying Advice
- 4 Tips for Millennial Home Buyers – Anita Clark
- Pros and Cons to “Renting-to-Own” – Ferris Property Group
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