Dear Quentin,
My mother is giving my son — her grandson — and his wife $100,000 toward the purchase of their first home. This money will be their down payment and will come from her checking account. She really doesn’t want to send it to them until they’re ready to make the purchase.
Does it need to be in their account while they’re looking for a home, in the event a lender asks to see it? Or can she just wire the money at closing straight from her account? Will there be a tax issue? They’re just in the beginning stages of looking for a home.
The Father
Dear Father,
Your son is a lucky man.
Rules vary by mortgage and financial institution, but the money would be better off in your son’s account than in your mother’s account. This will help boost their chances when the lender is assessing their loan application. It will also be useful to have if they are buying in a co-op whose board has the final say on whether they’re admitted into the building.
Lenders and co-op boards want to see that a buyer has a solid financial foundation, and some won’t take that $100,000 into account if they believe that it’s a loan. Because borrowers sometimes disguise loans as gifts to artificially inflate their bank balance, your mother will likely have to sign a letter testifying to the fact that this is, in fact, a gift and not a loan.
“With conventional loans, lenders usually allow gift money for some or all of your down payment, closing costs and financial reserves you’ll use to pay the mortgage,” according to Experian. “However, the acceptable sources are limited to family members and romantic partners, and gift funds can’t be used on investment properties.”
Federal Housing Administration loans — government-backed loans to help first-time or low-income families purchase a primary residence with a down payment as low as 3.5% — also accept these kinds of cash gifts for down payments, closing costs or cash reserves, Experian adds.
For FHA loans, gift money can come from a greater variety of sources than for conventional home loans. In addition to family members, those include close friends, employers or labor unions, charitable organizations, and government agencies and public entities with a homeownership-assistance program for first-time or low- to moderate-income buyers, Experian says.
Taxes and timing
For conventional mortgage applications, some lenders will only accept these kinds of gifts from an immediate family member, which could be a parent, sibling, grandparent or in some cases a fiancé or fiancée. The gift letter has several requirements, including a statement that there is no expectation of repayment, and, even when emailed, it must be signed.
Your mother can give any number of people $18,000 per year without filling out any paperwork or owing any tax. So she can give your son and daughter-in-law each $18,000 every year, or give them $36,000 as a married couple. If she gives more than that, she would have to fill out paperwork and the amount over that annual limit would go toward her lifetime federal estate-tax exclusion, which is currently $13.61 million.
Timing is important in order to avoid delays at the underwriting stage. “Many homeowners assume that as long as they have a down payment that’s large enough to meet a lender’s standards, they’ll have no trouble getting a loan. Unfortunately, this isn’t always the case,” says Rocket Mortgage. “Lenders need to know that you have the means to pay back your loan.”
The mortgage lender adds: “Most lenders consider your assets secure when they’ve been in your account for at least 60 days. If you have a major financial gift you want to use for a down payment, it’s a good idea to wait to apply for a mortgage until that 60-day limit passes. From there, your mortgage company is less likely to be suspicious of the money in your account.”
And, finally, some housekeeping. Once your mother gives that money to help her grandson and his wife buy a home, those funds are effectively commingled, unless the couple has a prenuptial agreement stating otherwise. And cash gifts, especially such generous ones, can sometimes come with an emotional “gift tax.” Let’s hope none of that applies here.
I’m putting my money on a happily ever after.
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