Could a Gift Be the Answer to Saving a Down Payment?
A down payment is often a major barrier for first time homebuyers to get into the real estate market. While there are numerous strategies to save money for a house, many buyers have family or friends who are willing to contribute cash toward their down payment. But if you’ve never dealt with this situation before, you may be wondering how lenders view this situation and what needs to happen in order to formalize a gift contribution. Here’s a closer look at using gifts to help finance the purchase of a property.
Differentiating Between a Loan and a Gift
One of the most important aspects that lenders will evaluate is whether a cash contribution from family or friends is truly a gift. If it’s a loan, even one that is granted on favorable terms with no interest and a later repayment date, lenders want to know. Any loans or debts count toward your overall debt-to-income ratio. Most lenders will request a gift letter to explain large cash deposits, stating the amount of the gift and verifying that it is in fact a gift that doesn’t need to be repaid.
Common Sources of Gifts
Buyers get cash contributions toward home purchases from a variety of sources. In some cases, a family member wants to contribute money toward a buyer’s future to help them get established. Often, parents or grandparents are gifting the money in lieu of (or in advance of) an inheritance. Many buyers also receive gift contributions by asking for cash in place of gifts for a wedding, baby shower, or holidays and birthdays.
When you’re serious about buying a home but need help to save up a down payment, consider having a conversation with your family to determine whether they have the capacity and willingness to help you. Another source of cash gifts may be your employer. Certain companies have programs where they’ll make a small contribution toward the purchase of a home after employees have been on staff for a certain period of time.
Are Gifts Taxable?
Typically, any gifts that you receive may be subject to taxation. Before accepting a gift, it’s best to talk to your financial advisor, tax preparer, or real estate lawyer to better understand whether it’s the right move for you. If the funds are taxable, it is important to set aside the amount needed to pay those taxes or have a plan to save that money over the course of the year ahead.
Are you a first time homebuyer in Las Vegas that needs advice on financing? Contact Sydnee Johnson today to arrange for a personalized consultation, and to discuss how a gift could help accelerate your down payment.