What are The Rules for Using Gift Funds to Buy a House?

So you're thinking about buying a home, but you want to know everything there is about taking gift funds from family members or where can they come from? Are they taxable? This blog is all about using gift funds to purchase a home and we're going to get after it right now.

We're going to be diving into all the different rules around using gift funds. What kind of tax considerations are there? How do you document it? All those sorts of things .

Can you take gift funds to buy a home?

Yes, you can take gift funds in general. The government is very generous about what can be done as well as lenders. Most lenders allow for gift funds to be used for all types of loans, including FHA loans, VA loans, Conventional, Jumbo loans, USDA. You have a wide range of options, as far as loans, and when it comes to gift funds,.

Here's the key things to keep in mind, as far as if you are receiving gift funds.

Rules for Gift Funds:

Document the Source of the Gift Funds

The first thing you need to do is to document that it is actually a gift fund and where it is  coming from. What family member or person is giving it to you depending on the situation.

Cannot be a Gift in Disguise

You have to make sure that this is not a gift in disguise, meaning it's not really just a loan that you have to repay after the fact.

How to Document the Source of Funds

In order to document the actual source of the funds, you need a letter first. That letter of course needs to be dated and use the include the name of the individual that is gifting the funds, and either needs to include the date that that fund is being transferred.

It needs to include the amount of the funds that are being transferred. It needs to include the relationship of the person that is giving the funds. It needs to also have the source of the funds. What bank is it coming from?

Is it in an investment account? Where is that coming from? You need to document and show the bank statements. And finally, it needs to specifically state that it is not a loan - that it is truly a gift.

You have to, again, show a bank statement of where these funds are located as far as savings account, money market, or other investment account. And then you need to show the paper trail that that money has been transferred either to the buyer or directly into Escrow.

Fund the Buyer or Escrow Holder

Generally speaking, you're probably going to want to have these funds wire directly to escrow. Most lenders prefer that versus going into a buyer's account first, it just makes it a little bit more complicated.

There's usually seasoning rules around money going into a person's account. They want to see that the money has been in there for more than 60 days. Usually it's best that the gift giver just sends it directly into escrow.

Once sent, confirm that it actually went into Escrow or the buyer's account. You need to have a bank statements or a statement from escrow showing that those funds were received. The lender is going to want to see all of these things in order to fully document those gift funds.

Who can give the funds to you

Generally speaking, it's going to be family members. Parents, children, siblings, by adoption, legal guardians, domestic partners, those are all folks that can give gift funds to you. The FHA and VA actually allows for more entities to give to you.

With FHA/VA loans, the gift giver can be non family members.. It can be a workplace, a charitable organization, even labor unions, interestingly enough. We have a few more options, but always check with your lender before taking gift funds and weighing up and thinking you're going to buy a home and then there's something wrong with that gift funds. Always check your lender first.

Something really important to note is that the money can not come from someone with a financial interest in that deal. That cannot come from the lender. It cannot come from your realtor. Realtors can credit money, of course, towards closing costs, that kind of thing, but you cannot just give them money if you're a realtor or a lender or someone with some other sort of financial interest in the property. Be very careful about that,

How much money can you be gifted?

Really the limit is so extremely high that for most circumstances, you're going to be perfectly fine taking gift funds. I was just involved in a transaction where someone was given about $400,000. It's definitely okay to take a quite a bit amount of money. It just has to be documented correctly.

Most people are probably going to be in the lower ranges of those, $20,000 to $100,000. Again, this is not financial or legal or tax advice, always consult with your CPA or an attorney before proceeding with any of these things.

And finally, related to this are  taxes: is this gift actually taxable? Well, again, talk to your CPA, but generally speaking, no gift funds are not taxable because it's being used towards the sale of a property. There's different rules around gifts, but generally speaking, this is not going to be taxable. You can use all those funds towards the down payment of your home.

That is everything you need to know about gift funds when you're purchasing a home for the first time, or maybe even a second time, depending on the situation.

Curtis Chism, Realtor
858-281-2568 | Mobile
mailto:info@sandiegohomes.io
Chism Team | DRE #02105113
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