Ah, November: the month of gratitude, giving, and the one that kicks off extra gifting. While it is well-known that our community has a high price tag for housing expenses, what is not so known are the different ways gifts are treated in lending. In my almost 30 years of experience, we’ve come across some creative ideas — in everything from monthly allowances to standard down payment help to Grandma’s gold doubloons, or even gifting the equity of a property to family for them to take it over in full. Let’s break down a few things so you can best execute any offer for help.
The normal thought of a “gift” in lending is for the initial down payment when purchasing a property. The majority of loans still require that the person giving the gift (the “Donor”) to be a family member, though some options exist for close relationships (a k a your brother from another mother) to be the donor as well. Gifts can be for part of, or all of, the down payment in many cases, or for closing costs, toward payoff of debts in order to qualify, or even for equity. In all accounts, the ability for the donor to give funds must be proven — typically by their most recent bank statement; as well as how the funds are received for the borrower to be used. Heads up, though: Hard cash itself is not typically allowed, as the source of it cannot be verified.
Sometimes, the borrower puts this directly into their bank account, and other times it can be directly to the escrow for closing. Though, if you are on the account with the donor, funds are not considered a gift. Instead, the other account holder would verify that you can use the funds as needed for your loan purpose. One more point to keep in mind is that the IRS’s limitation for gift versus income is not the same as a lender’s. They’re separate, so be sure to ask the questions you need for success.
A Gift of Equity is a unique situation where the owner of the property is giving the buyer of the property not cash, but equity in the home. For example, Mom has a house worth $1 million, and she then gifts 40 percent of it to her child getting the loan. The borrower then gets a loan for 60 percent of the property. In this situation, what’s extra unique is that the sales price does not have to be at market value. Lenders never set the purchase price of a property; we only support the value of it for lending purposes. So, in this above example, the appraised, or market, value of the property could be $2 million. This is a cool, unique way to keep property in the family, so reach out to your lender to see if it’s an option for you.
All of the above is so far addressing gifts as assets, but what about if it is income? The reality is that many of us support our families financially each month with a check. However, because this is not a required payment, it cannot be included in qualifying income. Trusts, or family partnerships that distribute income, are totally different, so be sure to connect accordingly if that is what you want to set up as support. This also applies to any sort of support from one spouse to another in a divorce situation. Simply because one spouse is giving money to another each month until their legally binding divorce decree is finalized does not mean that it is income that can be used to qualify. Again, the thought here is that it is not required and could be adjusted or canceled at discretion.
Lastly, some folks can qualify for grants toward housing from municipalities and charities. These are also not gifts and cannot be used for every type of lending situation. Not all grants and assistance are created equal, and it’s imperative to know what any requirements you might have for payback if you do use these funds.
We are fortunate to live in a community that has such a philanthropic heart. Giving is in our nature here, and we all work to support those around us in so many ways. Having a conversation with your lender about what you can do will set you up for success. There are so many options that exist to support your goals and getting them on the table is key. As we progress through this month of gratitude into the holiday spirit, know that the best gift of all is doing your best for everyone around you.
Austin Lampson is a licensed mortgage professional and branch manager of Movement Mortgage. She has spent the last quarter-century helping her clients balance math and emotion to achieve their financial goals. Reach Austin at (805) 869-7100, austin@austinlampson.com, or visit austinlampson.com.
