Funding Your Down Payment with a Gift

by Gina Pogol
February 18th, 2010

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Some of you lucky dogs have people who want to give you money for your down payment. That’s cool as long as the money is transferred and documented carefully — being too casual with your gift funds could get your loan bounced.

First, you can’t accept a gift from just anyone — no, it’s not trampy (I’m not your mother), but FHA doesn’t believe that an unrelated party is likely to actually fork over the funds while expecting nothing in return.

So sellers, real estate agents, or anyone else who benefits financially from the sale can’t “gift” you down payment money. FHA guidelines state that gifts from these sources are considered inducements to purchase and must be subtracted from the sales price. That means that on a $100,000 house, if the seller gives you $5,000 you don’t have a 5% down payment — you have a $95,000 house and you still need to make a $3,325 down payment. You can get money from:

Relatives

Your employer or union

A charitable organization or government agency

A close friend with a “clearly defined and documented” relationship with you.

What Documentation Is Required?

FHA does not care how your benefactor gets the money as long as it doesn’t come from someone else involved in the transaction. They can put your down payment on the Amex for all FHA cares. The donor needs to provide you with a gift letter containing the following:

Specific dollar amount of the gift;

Statement that the funds are a gift and need not be repaid;

Explanation of the donor’s relationship to the borrower;

Donor’s name, address, and phone number

Then you need to document the transfer of the gift funds. If you get the money before closing, you need a copy of the donor’s bank statement, a copy of the canceled check, a copy of your deposit slip, and a copy of your bank statement showing the deposit. If the money is being brought in at closing, you need the donor’s bank statement and the withdrawal slip or canceled personal check used to purchase a cashier’s check. If the donor borrows the funds, you need to prove that they came from an acceptable source.

Finally, consider that your friend-in-shining-armor could end up with an unexpected gift herself–a tax bill. It’s best to consult a tax planner before making this kind of move to be sure that everyone knows the repercussions of the purchase, including gift taxes.

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