It may be necessary to accept a cash gift to purchase a home if you don’t have enough money to make the down payment on a house.
If you’re lucky, your parents or relatives may be able to provide you with extra money to make a down payment on a home.
A cash gift can help you obtain a loan by making it possible for you to make the full 20% down payment needed to avoid paying mortgage insurance on your home loan.
There are a few basic tips that can make the process of accepting your cash gift hassle free.
Taxes on Cash Gifts
First of all, it’s important to understand that you do not have to pay any taxes when you accept a cash gift of any amount.
The recipient of the cash gift does not pay taxes, but the person who gives the cash gift may be required to pay taxes, although this is only required for relatively large cash gifts over an entire lifetime.
In 2009, an individual may give a cash gift of up to $13,000 to any single person without having to report the cash gift to the IRS or pay any taxes on the cash gift.
Any amount over $13,000 will have to be reported to the IRS by the person who gives the cash gift, and the additional amount will be added to their lifetime cash gift allowance of up to $1,000,000, but they’ll only actually be responsible for paying taxes on cash gifts once they exceed the $1,000,000 lifetime allowance.
When to Accept a Cash Gift
It’s best to receive the cash gift at least 2 to 3 months before you apply for a mortgage loan from a bank.
If you apply for your home mortgage loan and inform the bank that you will be receiving a cash gift to help pay for the down payment, the bank will require you to complete extra paperwork.
This may involve both you and your parents or relatives signing additional forms and verifying the funds are available to be exchanged.
You can avoid these extra hassles with the bank by simply exchanging the gifted funds before you apply for your home loan.
Most banks require that you provide your bank account statements from the prior 2 to 3 months when you apply for a mortgage loan, and you should accept your cash gift prior to this time frame, so that there is no specific record of the cash gift being deposited in the prior 2 to 3 months.
Once the cash is in your bank account, there is no reason to explain to the bank where it came from, so you can just apply for the loan as if the cash belongs to you, which it does at that point anyway.
This will help you avoid any extra paperwork from the bank when you accept a cash gift for the down payment on your house.
If you already have a lender or are applying for your loan within 1 or 2 months from the time you accept your cash gift (depending on how many months of bank account statements are required by your lender), then you will want to notify your lender that you are receiving a cash gift to help pay for your down payment.
Will a Cash Gift Help You Obtain a Loan
A cash gift will definitely make you a more attractive loan applicant, as it means you can make a larger down payment on your home loan.
A down payment for at least 5% of the total amount of your home purchase price is required by the bank to obtain a mortgage loan, and at least 20% is required to avoid paying mortgage insurance.
Just recently, it has become more difficult to obtain mortgage insurance with smaller down payments, so it’s important to pay as close to 20% as possible for the down payment on your house.
Otherwise, you may be required to take out a second loan to meet the full 20% for the down payment, if you are unable to obtain mortgage insurance.
A cash gift can definitely help you reach the 20% down payment on your house and make it easier to obtain a home mortgage loan.
Accepting a cash gift from your parents or relatives is an excellent way to raise the needed funds for a down payment on a house, if you’re lucky enough to have parents with the additional funds available to provide you with a cash gift.