Buying a house is a major investment and saving up for a down payment can take years. One way to achieve home ownership faster may be to have a family member or charitable organization cover some or all of the down payment. This is known as a mortgage gift—and it comes with its own set of rules, processes, and tax implications. To learn more about mortgage gifts, read on.
What Is a Mortgage Gift?
A mortgage gift is money freely given from one person to another, for the purposes of making a down payment. Lenders must be informed if some or all of a down payment will be covered through a mortgage gift. A mortgage gift can be used for the purchase of a first or second home, but not for an investment property. Importantly, a mortgage gift cannot come with any expectation of repayment—as this would affect homebuyer’s debt-to-income ratio and potentially impact their suitability to take out a home loan.
Who Can Provide a Mortgage Gift?
Money is often gifted from a parent or guardian to a child, or sometimes from a grandparent or sibling. Mortgage gifts can also come from a charitable organization or NGO—but be aware that depending on the loan program, borrowers may be limited in terms of the people from whom they can accept a mortgage gift. The Federal Housing Administration (FHA) is fairly open in terms of who can provide a mortgage gift, whereas conventional lenders Fannie Mae and Freddie Mac stipulate that down payment gifts must come from family, defined as blood or adoptive relatives, or legal guardians. A fiancée or domestic partner is also considered an acceptable donor.
How Much Money Can Be Gifted?
The allowable size of mortgage gifts depends on where you’re getting your home loan. The FHA allows for the entire down payment to be covered by a mortgage gift, assuming the minimum down payment requirements are met. Conventional lenders usually allow the same—although if the down payment is less than 20% of the home’s value, they may require the borrower to cover at least some portion with non-gifted funds, as an assurance of the borrower’s financial stability.
What’s the Mortgage Gift Process?
Giving and receiving funds for a down payment requires more paperwork than simply handing over a check. Lenders need to see proof of the relationship between the mortgage gift donor and the party taking out a loan. This is traditionally presented in the form of a gift letter. The letter should explain the relationship between donor and borrower; provide evidence of the donor’s financial standing; and confirm in writing that the money provided is a gift—with no expectation of repayment which could impact the borrower's debt-to-income ratio. A lender can explain what else is necessary to include in the mortgage gift letter, and possibly provide a template to ensure nothing is left out.
What Are the Tax Implications of a Mortgage Gift?
The borrower who receives a mortgage gift isn’t responsible for paying any taxes on the money and they don’t need to report it to the IRS. For donors, it’s a bit more complicated. The IRS releases gift tax exclusions yearly; for 2022, the amount is $16,000—which means if the amount gifted is at or under this number, it doesn’t need to be reported on the donor’s tax return. The exclusion amount is calculated per person, so a parent and their spouse could offer $32,000 collectively without needing to worry about a gift tax. If the gift mortgage totals more than the IRS gift tax exclusion, then it will be subject to gift tax or, if the donor wishes, it can count under their lifetime gift tax exclusion. Please consult with a tax accountant to ensure accuracy of the gift tax limitation as well as any other impact that may be applicable to your situation.
