There are plenty of people around with a lot of money in the bank. Unfortunately, many of them are older and already own houses whereas their kids don’t. There is a common myth that a parent cannot give their child a gift for the down payment for more than $14,000 without gift tax consequences, or that a gift must be spread out over several years.
Experienced originators know that this is not the case. Many first time homebuyers receive help from their families and many parents want to help their kids buy a home. Each parent can give their child $14,000, for example, each tax year for a total maximum of $28,000 per year from parents without having to pay a gift tax. This is helpful to know, because in some locations $14,000 may barely be enough to cover closing costs!
Lenders know that the IRS watches transactions like home purchases to make sure that all requirements of the tax code are met, but it does not require a donor (or the one receiving the gift) to pay a gift tax if the amount is over $14,000 in a tax year. It says that a gift tax return must be filed if more than $14,000 is given by any one parent to any one child in any one tax year but no tax is due. Unless the gifts given in a lifetime exceed $5.34 million, no gift tax is due. The one receiving the gift has no tax consequences. Be sure to consult your accountant for details.
But lenders have rules regarding gifts. In general, a borrower may receive a gift from a close relative to help him or her cover the down payment and closing costs. The gift amount is limitless when the down payment equals at least 20%. If the down payment is less than 20 percent, the borrower must have at least 5% of the sales price in his own money. An exception exists for FHA loans where all of the money needed to cover the down payment and closing costs may come as a gift from a close relative.
And gifts must be carefully documented, complete with a letter from the donor stating the gift does not have to be repaid and a paper trail of that gift to prove that the donor had the money to donate and that the borrower received the money from the relative.
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