What To Know Before Gifting A Home Down Payment To A Family Member

In recent years, saving money for a down payment has been difficult for first-time home buyers. While gifting money to your family member may seem like an easy way to help them acquire their first house, there are many factors to consider. To start, depending on how much you plan to give, you may end up having to pay a gift tax. According to the Internal Revenue Service, gifts made to one recipient in 2023 that exceed $17,000 will be taxed, and in 2024 the gift tax exclusion will be $18,000. If you expect the gift to be repaid in the future, this could further complicate a mortgage application, as it will add more debt for your family member.

For gifts that aren't provided as a loan, you'll have to write a gift letter explaining to the lender your relationship to the recipient, the amount of money given, and other details. Bank statements may also need to be provided. When planning to gift money for a down payment, be sure to consider when you're sending the money, how closely related you are to the person receiving the money, and what type of loan they are trying to get.

Who can you gift a down payment to?

For people applying for conventional home loans, there are several options for which family members can gift a down payment. Children, parents, siblings, and grandparents are all able to receive a down payment gift, as well as some extended family, such as nieces, nephews, aunts, and uncles. In some cases, a fiance or partner may be able to give money toward purchasing a home. Federal Housing Administration (FHA) loans allow a wide variety of people who can gift down payments, including family members, charitable organizations, employers, labor unions, agencies that offer homeownership assistance, and even friends. 

If you have a family member or friend applying for a Veterans Affairs (VA) loan, there are not as many rules about who can give, as long as they're not part of the transaction, such as a broker. Down payment gifts can change the game for many home buyers, but if they're putting down less than 20% of the home's price, a gift may not be able to be used for the entire amount; however, sometimes gifts may also be used for closing costs and other expenses associated with the purchase.

Tips for gifting a down payment

Once you've decided how much to gift your family member for their new home, it's a good idea to transfer the money directly to them a few months before they plan to take out a mortgage. This will allow time for the money to show up on your family's bank statements, letting lenders see how the funds have moved and where they came from. For those who want to give their family more than $17,000 in 2023, there are still ways to avoid the tax. For example, if a married couple filing jointly was planning to give their child money toward buying a home, each parent could provide $17,000, allowing for a $34,000 gift without having to pay the tax. If that child is also married, each parent could give the child and their spouse $17,000 separately, quadrupling the gift without hitting the tax. 

On the other hand, those who plan to give smaller sums might not have to deal with lenders or taxes at all. Gifts that equal less than half of the recipient's income for one month won't need to be taken into account by lenders. While these factors are important to think about, the most important consideration is the financial well-being of you and your family member. Make sure your family will be able to keep up with the mortgage once they own the home, and that the gift won't negatively impact your own finances.