Using Gift Funds for a Down Payment
A gift from a family member can be a great way to help you cover the down payment on a home loan. However, there are rules around using gift funds for a down payment, and these rules can vary depending on the type of loan you are applying for.
For most conventional and government-backed loans, gift funds can be used to cover the down payment as long as the gift is properly documented and the source of the gift is verified. The lender will typically require a gift letter, which confirms that the funds are a gift and not a loan, and that the giver does not expect to be repaid.
Gift Funds for Self-Employed Borrowers
For self-employed borrowers, the rules around using gift funds for a down payment are the same as for traditional borrowers. However, because self-employed borrowers may have more complex financial situations, there may be additional requirements when it comes to verifying the source of the gift funds.
Lenders will typically require documentation of the gift, including proof of the giver’s ability to give the gift (such as bank statements) and proof of the transfer of funds. In addition, the lender may require additional documentation to verify the self-employed borrower’s income and financial stability.
Tax Implications of Gift Funds
It’s important to note that gift funds can have tax implications for both the giver and the recipient. In most cases, gift funds are not considered taxable income for the recipient. However, if the gift is large enough, it could trigger gift tax obligations for the giver.
To avoid gift tax, the giver can make annual gifts of up to $15,000 per recipient without triggering gift tax. For larger gifts, the giver may need to file a gift tax return and potentially pay gift tax.