Two common forms of gifts in the mortgage world are gifts from relatives and gifts of equity. Understanding these options can help you make informed decisions and achieve your homeownership dreams.
What Is a Gift from a Relative?
A gift from a relative (or a non-relative that share a familial relationship to you) is a monetary contribution that a family member provides to help you with your home purchase. This gift is typically used for the down payment, closing costs, or other expenses associated with buying a home. Here are some key points to consider:
Documentation Requirements: Typically, a "gift letter" & bank statements (recipient & donor) are required. The letter should include the donor's name, relationship to you, the amount of the gift, and a statement that repayment of the gift is not expected. The bank statements verify the availability and receipt of the gift funds.
Limits on Gift Amounts?: While there are no hard caps on the amount you can receive as a gift, the donor should be aware of annual gift tax exclusions set by the IRS. As of 2024, an individual can gift up to $17,000 per recipient annually without triggering gift taxes.
Eligible Donors: The general requirement is that the gift come from a close relative, such as a parent, grandparent, or sibling.
What Is a Gift of Equity?
A "gift of equity" is a gift provided by a relative (or non-relative that share a familial relationship to you) when you purchase a home from the relative. The gift of equity represents a portion of, your relative, the seller's equity in the property. This equity is gifted to you, the buyer, as a credit towards the overall transaction. Here’s what you need to know:
How It Works: The equity gift is applied directly toward your down payment & closing costs. This can help in reducing the amount you need to borrow.
Documentation: The home must be appraised to establish its market value, and the sales contract must be documented properly. Also, is the requirement of a gift letter for the equity amount, similar to cash gifts.
Tax Implications: Gifts of equity are also subject to IRS gift tax rules. However, the donor can use their lifetime gift tax exemption to avoid paying taxes on larger equity gifts.
How Gifts Impact Your Mortgage Application
By increasing your down payment, gifts can help you:
Qualify for a better interest rate.
Reduce or eliminate the need for private mortgage insurance (PMI).
Strengthen your overall loan application.
Final Thoughts
Receiving a gift from a relative or a gift of equity can be a game-changer for first-time homebuyers. These generous acts of support can make homeownership more accessible and affordable, but it’s important to understand the rules and requirements involved. By doing your homework and working with experienced professionals, you can turn your homeownership dream into a reality!
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