Gifts Still Make Great Down Payments
Down payment assessment gift programs are dead for the foreseeable future, but home buyers can still receive and use gifts to supplement their down payments with FHA loans. It's just important to be informed about the rules and restrictions.
In response to the foreclosure crisis of the past several years, legislators created the Housing and Economic Stimulus Act that was signed into law by President Bush on October 1, 2008. One of the new regulations banned FHA home buyers from receiving down payment funds from any interested third party participants. Statistically it has been shown than buyers that put almost none of their own money down up front are much more likely to default. There used to be several not-for-profit companies that facilitated the transfer of down payment money from sellers to buyers using FHA loans. These have all been essentially eliminated from the market as a result of the new law.
Yet buyers today and especially first-time home buyers are often in need of extra help when it comes to the down payment. FHA loan programs still allow buyers to receive gifts, just not from anyone with any interest in the sale. So the generosity of relatives and long-time friends can be accepted as long as a few specific rules are followed.
First, the gifted funds must be "seasoned," which means they must have been sitting in the buyers bank account for several months. Donors cannot just give the buyers the down payment money the day of the mortgage closing. Buyers need to obtain their gifts well before they plan to move in to their new homes.
Second, the money must be documented with a gift letter. This letter specifies the donor name and relationship to the home buyer, how much money was gifted and where it came from. Friends giving gift money must actually prove they have had a long-standing relationship with the home loan borrower. All this may seem like a huge invasion of privacy, but the reasoning is that lenders need to verify that the down payment money comes with no strings attached and was legally obtained.
The gift letter must be accompanied by teller receipts that show both the gift giver's withdrawal of the money and the home buyer's deposit of that gift.
There is no limit on the amount of money that can be gifted from a friend or relative, and when it comes to taxes, the buyer will never be taxed on the received gift, and as long as the money does not exceed $13,000 (based on 2009 IRS rules) the donor will not have to pay a gift tax either.
With falling home prices and rock-bottom mortgage interest rates, now is a great time to break into the market. New buyers can still overcome the biggest and most common challenge to homeownership with a little (down payment) help from their friends.