For many first-time buyers, coming up with the down payment is one of the greatest challenges of buying a home. If a loved one is willing to Gift you the money for a down payment on a Long Beach home, it may be just what you need to clear a major hurdle to buying your home, but make sure you are aware of the pitfalls and restrictions. Using money you receive as a gift to buy your home usually comes with additional paperwork and there may be tax consequences to consider. Here’s what you should know.

Can You Use Gift Money?

Rules for using a gift for a down payment used to be much more stringent as you would need to put down most of the money yourself if you had a down payment of less than 20%. Today, you can usually use gifted money for your full down payment or just a portion as long as the home will be your primary residence. A gift can almost never be used for an investment property, but you may be able to use it for a second home as long as you are not using an FHA loan.

There are also restrictions on where a gifted down payment can come from. In general, you can only use Gift Money from someone who is a blood relative to you or your spouse, although it is possible to use gift money from a fiance or spouse. Lenders will look to make sure of the relationship between you and the gifter. Your lender may be willing to make a case-by-case exception on this rule, but you can expect that the relationship and any other factors in your loan must be compelling to be approved, such as receiving gift money from godparents who have been close to your family for your whole life. An exception is also more likely if you have a top-tier credit score and strong income history.

Gift Money Must Be Documented

If you are going to use gift money for your down payment, you can expect that your lender will want documentation to prove it’s a gift and not a loan. If it’s actually a loan, the lender will want to factor in that loan payment into your monthly expenses to qualify you for a mortgage.

The documentation you need depends on whether you are getting an FHA loan or a conventional mortgage. With an FHA loan, a bank statement from the gifter and giftee is necessary to show the money going in and out. With a conventional loan, a wire transfer confirmation page and your bank statement may be all that’s necessary.

Documenting that the gift money does not need to be repaid is usually as simple as a gift letter from the person providing the money. This letter must make it clear the money is a gift, provide a date and amount of the gift, include the address of the home you are buying, and explain the relationship between you and the giver.

A paper trail of the funds transfer is usually necessary as well. There are a few ways to do this. If the gifter writes a check for the gift money, you can submit a copy of the check as proof of the transfer along with your bank statement to show the check cleared. The gift giver should also provide a bank statement to show when the gift money was withdrawn. If the person giving you money did not have the cash sitting in their bank account for at least two months, they may also need to show the paper trail for where the money came from, such as the sale of stocks.

There is an alternative to providing this paper trail. If you allow the funds to “season” in your bank account for at least three months, you will not need to provide proof about where the money came from. Your lender will only want bank statements for the past three months. If the money was deposited before then, the lender is unlikely to even ask about the cash.

Are There Tax Implications?

It’s a good idea to make sure your family member is aware of any gift tax implications. As the recipient of the gift money, you will face no tax consequences. The IRS has an annual gift tax exclusion that allows one person to gift up to $14,000 to someone else without triggering a gift tax. Making a gift within this limit generally does not affect the gifter’s tax return at all and this limit only applies per person. A married couple, for example, can give up to $28,000 to a child without triggering the tax, or up to $56,000 to a child and the child’s spouse. In this case, it would be best to do it as four separate checks. If the couple together write a check for more than $14,000, the parents will need to file a gift tax return and agree to split the gift amount.

If the gift will be more than $56,000 (or the limit that applies in your case), the gifter can file a gift tax return and count the cash toward the lifetime gift exclusion of $5.25 million.

As long as you understand your lender’s requirements and restrictions for gift money and your family member knows whether there will be tax implications, the process of using a gift for your down payment is simple and easy. Before moving forward with a loan on your Long Beach home, confirm what documentation you will need from your lender to avoid delays in the loan approval process.

Ready to buy a home in Long Beach? At Evergreen Properties and Investments, we take pride in helping our clients make informed real estate decisions. From advice on the right loan option for your situation to finding the home of your dreams, you can expect superior customer service and a focus on solutions tailored to your needs every step of the way. Contact us today to learn more about buying a home in Long Beach and using gift money for your down payment.