As we head into 2022, the housing market is starting to shift and many who were previously avoiding the competitive market are now considering taking the plunge. As we know, saving for a down payment can be a major obstacle for many millennial and Gen Z homebuyers, particularly for those dipping their toes into the market for the first time. ‘Tis the season for giving and many parents or family members may look to gift a down payment to their children, providing them that extra support in meeting this financial feat.
But many don’t realize gifting a down payment entails much more than signing a check and handing it over — there are legal, tax and financial implications that must be taken into account to ensure it goes smoothly. Advisors and lenders need to work together to guide parents and family members who may be considering giving the gift of a down payment. Here are some tips on how to help them through the process.
Who Can Gift a Down Payment?
It can be easy for a client to get caught up in the spirit of giving and forget about how a gift of this size might impact their financial future. First and foremost, consider if your client is in the position to gift a down payment based on their own financial standing and plans for retirement. Making this assessment should be your first topic of discussion with the client.
Additionally, donor requirements vary by lender and mortgage program. Some programs only allow gifts from a blood relative, or in some cases, a godparent. Other programs, however, will also allow gifts from a charitable organization or a non-blood relative. Your clients should speak with their lender for information on acceptable donors before considering the process.
“Additionally, donor requirements vary by lender and mortgage program. Some programs only allow gifts from a blood relative, or in some cases, a godparent.”
How Much Can Your Client Gift?
The maximum monetary amount that can be gifted to a family member largely depends on the type of loan the giftee will be pursuing. For many loans, your client should be able to put down the full amount if they desire — but if they plan to put down less, it should be noted that the loan recipient will have to pay some of the payment themselves.
What Steps Will Be Taken?
Lenders need to make sure that the gift was truly a gift — not a loan. When lenders are underwriting the loan, they will check statements to ensure that any large deposits, outside of regular deposits like paychecks, are actual assets of the loan recipient. This ensures the loan recipient will be able to afford their total mortgage over the course of the loan term.
Additionally, advise your clients that they’ll need to take some extra steps to guarantee the down payment gift can be utilized toward the mortgage. Those gifting the funds should keep documentation of the transfer and write a gift letter which includes a confirmation that the funds are in fact not a loan. This will make the process for the loan recipient smoother.
Some gift-givers are caught in the dark when they learn lenders will also need their proof of income and bank statements (even if they’re not a co-signer on the loan). Your client’s lender will require documentation proving the down payment money has been received by the homebuyer. This could include bank statements, copies of the check and buyer’s deposit slip, a copy of the gift giver’s check to the title agent, or a copy of the settlement statement showing the gift was deposited.
This being said, be sure your clients are prepared to move quickly in sharing the documentation and appropriate statements for their gift recipients’ mortgage, as this slowdown could impact the mortgage’s closing time. Speed is paramount in this low inventory market, and the most prepared buyers will be the most successful.
When Should Clients Start the Process?
If a client is considering gifting a down payment, ideally, they should have a discussion with the recipient before they start their home search so that each party can prepare documentation of the gift ahead of making any offers. For many loan options, gifts received far ahead of time, for example four to five months ahead of the loan and home search, oftentimes require less documentation and back-and-forth during the underwriting process.
What Does the Gift Mean for My Client’s Taxes?
While gifting does reduce the overall taxable estate of the gift giver, gifted down payments can also be taxed depending on how much is given. As with any other gift including charitable contributions, anything above $15,000 must be reported as a gift tax return. You should let clients know it’s possible they will be taxed on the gift, although this is unlikely unless they gift more than $11.7 million in their lifetime according to the newly revised lifetime exclusion on taxable gifts.
The gift recipient doesn’t have to report the gift to the IRS or pay gift or income tax on it.
When in Doubt, Talk to the Experts
Consulting with a mortgage lender for expertise in gifting down payments is paramount.
Many buyers and gift-givers wait too long to speak with a lender, approaching them after they have found the home they want to buy.
However, it’s important to engage as soon as possible to get a full picture of their financial situation and how to make the process successful, particularly as there are many moving parts and parties involved when it comes to gifting something so valuable. The process of receiving a down payment as a gift can be yet another variable to slow the mortgage process if not addressed ahead of time. So, be sure your client considers taking the steps necessary to gather documentation before their gift recipient finds a home.
Financial advisors and lenders can work together to ensure clients are set up for success with their purchase in a way that’s beneficial to the gift giver’s financial future as well as the recipient’s.
Scott Lindner is national sales director for mortgage lending at TD Bank. He is accountable for leading TD’s mortgage loan officer salesforce. His other responsibilities include guiding sales strategy, product development and integrating with TD’s East Coast retail network.