Looking a gift horse in the house

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Published Date 11/21/2024

A gift is a gift, right? Well, when it comes to being gifted funds for a down payment on a house, the warning should be — not so fast. There are rules to be observed with this act of generosity as well as ways it can backfire, according to Realtor’s Jillian Pretzel.

“For most would-be homeowners, the magic number for a down payment is 20%,” she says, explaining how putting down 20% means you can skip the costly private mortgage insurance that lenders require on lower down payments. She adds that it also means lower monthly payments and, typically, better loan terms. “But here’s the reality check: Saving up that hefty 20% on a home today—especially in many places with high median home prices—can seem downright impossible.”

Gift money is made up of funds given, typically from a close relative, to cover a down payment, closing costs, or other homebuying expenses — a powerful advantage in high-priced markets — and often the difference between delaying a purchase and getting to build equity today. But it’s not without its dangers, according to Pretzel. If recipients mishandle their funds, it can throw a wrench into their home purchase plans.

She lists the most common snafus people make when receiving family gifts and how to avoid these financial blunders, the first and most important of which is not having first spoken to a lender. Nothing regarding large amounts of money should be done during purchase time without first clearing it with your loan officer. Why? Because each lender has an underwriter with specific guidelines on how and when gift funds are received.

“The underwriter may want to see the gift donor’s account and may have a cap on how much the buyer can accept,” says Pretzel. Without this scrutiny, the recipient might need to return the gift money (“seasoning” it) and wait a period of time before starting over, following their rules. Thinking you can make an offer on a home without knowing this could ruin your chances of getting it.

Another faux pas is failing to document the gift properly. No Tony Sopranos here, please, with money having fallen off the back of a truck. A prospective buyer can’t simply deposit a big check in their bank account and expect no questions, because the buyer needs to show where that chunk of change came from. To be clear, the donor must write a letter disclosing their name, their relationship to the recipient, the gift amount, the date of receipt, and a statement that says the money is not expected to be repaid.

What about taxes? “The IRS imposes a tax on monetary gifts,” says Pretzel. “While a gift recipient generally doesn’t need to worry about this—it’s usually paid by the person donating the money—some donors want the receiving party to pay the tax, so it’s good to discuss ahead of time."

Another no-no is thinking you can handle receiving gift money using online platforms like Venmo or Zelle. New York-based mortgage broker Fred Goncher says it’s essential to receive your home’s funds the old-fashioned way. “Always get gifts via check or EFT that can be verified.”

And keep in mind that it’s prudent to set aside a portion of the gift money for the ongoing costs of homeownership. Experts recommend that buyers allocate at least 10% of any financial gift toward an emergency fund for home repairs or unexpected expenses—especially in the first year of ownership. Keep a reserve of three to six months of living expenses in liquid assets like money market funds, savings, checking, and cash.

Realtor,TBWS

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