You’re about to reach the next level in homeownership and are going to need a down payment. You’ve got a good idea what you’ll need to save up and how long will it take but how can you get there faster? You could go straight to your family member or friend who offered you money for a down payment, but is that really an option? It is. Lenders call it a Gift of Equity, read on to learn more.
A gift is a gift, not a loan
The IRS has some very specific rules about gifts that you have to follow.
It starts with the “who.” Gift money must come from a non-interested party, also known as a person with no financial interest in the property or the transaction. That person is referred to as the donor. A parent is the most common donor for most homebuyers.
You’ll need documentation from the donor that clearly states that the money is a gift, not subject to repayment and not given in exchange for interest in the property. If either of those is the case, your donor is offering a private loan, referred to as a “silent mortgage” by lenders. That’s an option too, but is a different proposition entirely and something that needs to be disclosed and discussed with your Loan Officer to ensure that it is done the right way.
Gift money is technically taxable by the federal government, but it’s only a concern if you’ve exceeded the IRS’s annual and lifetime gift exemption limits. The annual gift tax exemption threshold for 2024 is $18,000, which may sound like a consideration, but that cap only matters once the lifetime limit, a comfortable $13.61 million, is surpassed. Talk to your tax advisor if you find yourself in that situation and let’s do lunch!
It’s more common than you think
In 2022, more than 22% of first-time homebuyers received a gift of equity to help with their downpayment. And 2021 may be more representative; then, 28% of first-time home buyers benefitted from a gift of equity.
The common element everyone who might have a donor in their family or network? Not one let their own shyness, pride, skepticism or independence stop them from accepting that generous gift of an accelerated path to homeownership.
Actions you can take:
- Check your friend/family network
- Confirm it’s a gift and not a loan
- Write up a document
- Don’t forget the IRS document
- Write the world’s best thank you note!