Gifting a down payment can provide helpful financial assistance to someone looking to purchase a home or other residential property. If you're thinking of gifting all or part of a down payment, here are a few things to consider.
Reasons to gift a down payment
Reasons for gifting a down payment can vary. Many people do it to help a relative like a child, grandchild, or parent. This financial help can enable them to buy a home earlier than expected. It can also reduce their monthly costs if they can make a larger down payment than they were initially planning. Helping someone make a down payment of 20 percent or more can allow them to avoid paying private mortgage insurance. Gifting a down payment can also help the recipient funnel more of their own savings toward closing costs, taxes, insurance, repairs, upgrades, and other purchasing considerations they may need to factor in.
Considering your relationship to the recipient
It may be helpful to consider your relationship to the recipient of your gift. Depending upon the mortgage lender, gifted down payments are generally acceptable from close relatives like a grandparent, parent, child, spouse, or domestic partner.
Considering their budget
Talking about the recipient's overall budget before gifting any funds can help you get on the same page about the homebuying process. How much is the asking price of the property they wish to purchase? What percentage are they thinking about putting down? What payment can they afford monthly? You might be able to provide them with a down payment for a million-dollar home, but they may not be able to afford monthly payments for a mortgage that size. Discussing their budget will help inform the size of the gift you decide to give.
Deciding how much to give
How much you give is a personal decision and can depend on the total cost of the property, the recipient's budget, and other financial considerations. Some people may give a portion of the down payment while others may wish to contribute the entire down payment. Generally, gifted money under a certain amount can be given or accepted without impacting your lifetime gift tax exemption. However, it may be useful to assess how much you wish to give and whether it falls under that amount by consulting a tax professional.
A lender may ask for a gift letter-a written statement letting them know the money for the down payment is a gift and not a loan. These letters can include the giver and recipient's names and addresses, their relationship to each other, the amount of the gift, clear statements that the money is a gift as opposed to a loan and that the giver has no interest in the property's sale, the date the money was transferred or given, and the giver and recipient's signatures.
Discussing purchase protection
Anyone gifting a down payment may want to discuss purchase protection with the recipient, especially if they are a first-time home buyer. The death benefit from life insurance can ensure that the buyer's heirs can continue making mortgage payments, even if the buyer passes away unexpectedly. First-time homebuyers on a budget often opt for a term life insurance policy that matches the term of the mortgage.
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