Graduation season is right around the corner! Give the college graduate in your life a practical graduation gift this year – a gift fund! Gift funds, or gifts of equity, are a great source of down payment funds for those who are ready to purchase a home. 

 For someone to apply gift funds toward their down payment, there are certain rules that must be followed. We’ll breakdown the guidelines, rules and tax implications of gifting funds. 

What is a Gift Fund?

It sounds exactly like it is- a gift! Gift funds must be a genuine gift from the donor and can’t be paid back as a loan. The donor cannot have any interest in the property that the fund is going towards, and there must be documentation of the donor’s transfer of funds into the recipient’s account.  

Gift Fund Guidelines:

There are certain guidelines regarding gift funds that depend on the type of mortgage product. If you plan to use a gift fund toward the purchase of your next home, be sure to communicate with your loan officer. Your loan officer will help you select the best loan that suits your financial needs, and gift fund guidelines.

Documenting Gift Funds:

Once you’ve determined that gift funds are accessible for your home purchase, documenting the gift is important. A gift letter will need to be completed by the donor. That letter includes the following key pieces of information: 

  • Name and address of the donor 
  • The amount of the gift 
  • The property address of the home you’re purchasing 
  • The relationship of the person who’s making the gift 
  • Where the funds are coming from (i.e. checking account, savings account, investment account) 
  • Clear explanation that money is a gift, and not a loan 

Note: Eligible donors vary with each loan product. Gifts from family members are always acceptable. 

  • Your loan officer will review the gift letter for completion, and then gather the documents that: 
  • Verify gift funds in the donor’s account 
  • Deposit of funds in your account 
  • Typically, they use bank statement to document this process. 

Tax Liabilities & Gift Funds:

As the receiver of a gift fund, you will not incur any tax liabilities, however, the donor of the gift can incur the gift tax if it exceeds the annual exclusion limit. Contact your tax professional to see if your donor will be subjected to the gift tax. It is important to communicate this tax liability with your donor. 

Give the gift of homeownership with a Gift Fund today! Connect with one of Direct Mortgage Loans’ Loan Officers to learn more!