S2E20 – Using Gift Money For A Down Payment When Buying A House

Are you a first time home buyer wondering about gift funds when buying a house? Can you use gift money to buy a house as a first time home buyer? How much of your down payment can be a gift? Can you get a gift for the down payment and the closing costs? Is there anything special that is required when using gift money for a down payment when buying a house? In this episode, we discuss how lenders look at gift money when getting a mortgage to help you become The Educated HomeBuyer.

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Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith

Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: josh@buywisemortgage.com ➡I N S T A G R A M ➳ https://www.instagram.com/borrowsmartjosh ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart

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For Show Notes, See Below 👇

 [00:00:10] Jeb Smith, Huntington Beach Realtor: It’s not Christmas or your birthday, maybe it is, but either way, we’re gonna be talking about gift funds when buying a house. A lot of home buyers out there get funds from relatives, from family members when, buying property. And because housing affordability is sitting at near term lows, it’s difficult for many home buyers out there to come up with the down payment to buy a house.

So Josh and I wanted to spend some time today, walk you through the process. It seems Very easy surface level when talking about gifts, but we wanna dive into it a little bit more detail to help you understand exactly what you’re getting into. If you’re getting a gift to buy a house. Josh? 

[00:00:53] Josh Lewis, Expert Mortgage Broker: We’re gonna try and keep it real simple today, Jeb. The reason being is it is simple in 98% of situations. There are some unique circumstances where you’re buying two to four unit property, weird stuff where the guidelines change. 95% of borrowers who are getting a gift are using it to purchase their primary residence, a single unit. So whether it’s a single family home, a condo, a manufactured home.

And for the most part, all of those guidelines are surprisingly consistent. So we’re gonna do our best to keep it easy and straightforward. To tell you not just the guidelines of what you can do, but also how to do it. if you were to look up the letter of the guidelines, every agency, so meaning Fannie Mae, Freddie Mac, FHA, VA, USDA, they don’t match up identically, but they’re pretty darn similar.

And what I can say is, If we have a valid donor with a valid gift giving you funds that we can document, meaning it didn’t just come outta thin air under the mattress, I’ve never had a problem using gift funds. So we’re gonna give you the broad strokes of optimally receiving a gift and having a smooth transaction.

So how’s that work, 

[00:02:03] Jeb Smith, Huntington Beach Realtor: Awesome. But let’s start very elementary. What are gift funds? 

[00:02:08] Josh Lewis, Expert Mortgage Broker: So a gift is any monies from a party that you have a relationship with, most relationships are acceptable. We’ll go through that. They’re defined a little bit differently from each agency. But a party that you have a relationship with, who is giving you funds to use for your down payment, your closing costs, your prepaid items to acquire a new home.

[00:02:29] Jeb Smith, Huntington Beach Realtor: Got it. And so while, you mentioned parties who is a potential eligible donor when it comes to getting gift funds? 

[00:02:39] Josh Lewis, Expert Mortgage Broker: So pretty much all of your family, an employer, a labor union, a close friend, if they have a clearly defined relationship to you. A thing that I would like to point out here, every agency has their own guidelines.

We could bore you by reading the paragraph of who they define as an acceptable [00:03:00] donor. What I can say is I have never been asked to prove a relationship. So if it’s someone that has a valid interest in you and wants to give you a gift, I have never had a problem with the gift letter working. So in simplest terms, the easy ones are: parents, stepparents, siblings, grandparents, if there’s a family relationship or some type of longstanding friend family type relationship, you’re going to be able to do it. 

If it’s an employer there are some additional guidelines that come into play, so you’ll wanna talk to your loan officer, but. If someone is interested enough in you and has a tight enough relationship with you to give you a gift, it’s generally gonna be an acceptable source of funds.

One of the things we didn’t talk about in there, Jeb if you have a relationship, a fiance, so technically you’re not yet family, but absolutely acceptable. In-laws so you are not blood related to them. But the big picture that I want you to understand, again, I don’t know that I’ve ever come into a situation where we didn’t have an acceptable relationship.

They exist, but if you define it right and complete your gift letter in a way that explains why this person is interested in you enough to give you a gift we can generally use it. 

[00:04:16] Jeb Smith, Huntington Beach Realtor: I have an example past scenario where there was a relationship, if you will, but the gift was, acceptable on paper but later came not to be acceptable. And we’ll talk about that here in a minute. But at the end of the day, if somebody’s willing to give you a gift, chances are it’s gonna be good. That’s what I got from what Josh was saying. But let’s talk about the idea of an agent giving you a gift, a real estate agent, a real estate or a mortgage lender rather. Those parties, they know you, right? 

Say, I know you and I’m helping you buy a house and I’m giving you gift funds in order to do that, is that acceptable? 

[00:04:53] Josh Lewis, Expert Mortgage Broker: So we’re talking about interested parties. So a seller, a builder, a realtor in a transaction. Those people are interested parties because they’re going to profit from that transaction.

So the guidelines vary by agency. So we talk a lot on the show, Jeb, that there’s Fannie Mae guidelines, Freddie Mac guidelines, they almost always match up. But some of those situations are just a little bit off from each other. So Fannie Mae, The gift donor cannot be an interested party. If your realtor has an acceptable donor relationship with you, but they’re an interested party, they can’t give you those funds.

Freddie Mac says yes. Now, interested party contribution limits apply. We’ve talked about that on the show before. So the seller can give you a credit. Towards your closing costs, but only up to certain limits. So Freddie Mac, if we have someone giving you a gift in the transaction that is considered an interested party, those interested party contribution limits will apply.

But yes, you can do it. Most importantly, FHA says yes, and that those interested party contribution limits do not apply. So FHA is the most lenient. VA goes and says, No interested [00:06:00] party contributions. The fun and interesting part about a VA loan is there’s no down payment required there. So what are we talking about?

Funds to cover closing costs credits. So let’s say that your realtor wanted to give you 2% of the commission to cover your closing costs. I don’t think that Jeb, you as a realtor, would’ve a problem going to the seller and saying, Hey, will you just reduce my commission by 2% and give that same credit to the seller?

So it’s an area where if we get into these situations, We can work through ’em, we can work around them. We just need everyone to be on the same page and say, what do we want to accomplish? What is everyone willing to do? What do the guidelines say and how do we make that happen? 

[00:06:38] Jeb Smith, Huntington Beach Realtor: Yeah. And to follow up to the story I mentioned, so back in the day when I did loans, I stopped doing loans in like 2012 ish. So this probably like 2006 or seven. So right in the heyday, it might even been a little bit before that. Had a client that came up short to close on their funds. So I said I’ll gift you the funds to close. Lender was okay with it at the time. Was a subprime lender and in fact, they, it was an A paper lender, but they also did subprime. They were bought by Bank of America. You can put the the pieces of the puzzle there together.

But nevertheless did the loan and about six months later, I got a letter from the lender basically stating something along the lines of us not being able to submit loans to them anymore because there was a gift involved.

Even though they approved it, they allowed it. I don’t really remember all the details. I just remember it being an issue because I was the mortgage professional at the time, I was not the real estate agent, and I gave the gift, which I guess ended up being part of their down payment and long story short ended up being an issue. 

So nevertheless, make sure you’re talking to a lender, going over the guidelines and letting them walk you through that process. Now, Josh, with that said, I know with investment property, with units, with different types of property, gifts are done in different ways.

And I know we don’t want to go down a rabbit hole on some of this stuff because, we could do entire episodes on it. But do you want to touch on any of this stuff? 

[00:08:07] Josh Lewis, Expert Mortgage Broker: There’s one important piece that we can state very simply. FHA VA and USDA are owner-occupied primary residences only, so this wouldn’t apply.

So when it comes to investment properties, both Fannie Mae and Freddie Mac will not allow gifts. So if you’re buying an investment property, know that those funds need to be yours. If you have a family member who’s going to give you a gift to buy an investment property, put that money in your bank and season it for 60 plus days so we have two full statements with it sitting into your account. 

No one goes back and does a forensic audit to confirm that you didn’t get a gift three months ago. But if it has to be sourced as a gift through the current transaction, you can’t use those on investment properties.

Now, if you’re buying owner occupied, Duplex three or four units. Guidelines get a little dicey. We’re not gonna go down that rabbit hole. Just make sure your loan officer knows what you’re buying, where the funds are coming from, and make sure [00:09:00] we’re sending and setting up the loan to the correct agency.

[00:09:03] Jeb Smith, Huntington Beach Realtor: Now. Gotcha. Let’s talk a minute here about gifts. What are gifts? We’re not talking about giving presents to one another to help you buy a house, right? That’s typically not going to help unless it’s wrapped in a box with a bow on it and it has a bunch of cash or checking it for you.

But when we talk about gifts, Josh, what are we talking about? Where’s this money coming from? Where can it come out of from one party and given to another party, if you will? 

[00:09:24] Josh Lewis, Expert Mortgage Broker: In all of these situations, we have to document that the donor has the ability to make the gift to you. So that’s the critical part.

So we have to source those funds and we’ll go through the different agencies do it different ways, but the easiest way to document the funds and the transfer and easiest meaning, so that we’re not gonna have to get a printout showing that the funds left your donor’s account, that the funds came into your account and then you transferred them over to escrow.

It is always my preference in probably every other lender on the planet that we get the gift letter upfront that states all of the things that we’re gonna go through that need to be in that gift letter. But it also states the gift to be given at close of escrow, and your gift donor wires those funds directly into escrow.

The benefit of that is all that documentation that we have to show the route that the money took to all those different locations from the donor to you to escrow, it all gets eliminated. Escrow sends the lender a receipt that says they received X dollars that matched the amount of the gift from the account that was owned by the gift donor that we documented in the gift letter.

Now, The additional benefit there of that Jeb, on a conventional loan, so Fannie Mae, Freddie Mac, that constitutes proof of the donor’s ability to gift. Meaning, on an FHA loan, we’re always gonna have to get a bank statement from the gift donor showing that they have the money.

On a conventional loan, they will allow that wire arriving as proof that they had the money to give you. Interesting that they do that. It certainly opens it up for abuses. I would be naive to think that I haven’t ever had a borrower who had 10 or $20,000 of funds that couldn’t be sourced mattress money or whatever, that went to a gift donor and then got deposited and wired into escrow.

But on a conventional loan, you don’t have to have a statement showing that you have the money. On an FHA loan, gifts aren’t super common on the VA loan like we talked about before, FHA and VA, they’re going to require that we actually document the donor’s ability to gift with a statement. 

So, let’s say you had that situation, “Hey, I got mattress money. I’m gonna give it to my dad, and he’s gonna gift it to me and it’s gonna be okay.” If he had a $20,000 deposit on his last bank statement or last bank statement, he had $8 and now he just wired you $20,000, that’s not going to be acceptable. We have to have those funds documented and verified when we’re actually transferring funds.

Now can it be done another way? Yes. They can write you a check. They can write you a cashier’s check, they can send those items to escrow if escrow will accept them, and we all [00:12:00] wait until it clears. All of those things require additional documentation, additional timelines. So please, for the love of all things holy, just have your donor wire directly to escrow ,at the close of escrow. There may be a small wire fee for them to do that. $15, $25, $30. Worth it in terms of the headaches that it removes out of that scenario. 

[00:12:23] Jeb Smith, Huntington Beach Realtor: No, that’s good stuff. I actually learned something there. I didn’t realize that you didn’t have to provide a bank statement when you just did the gift letter on conventional and then could wire the funds.

So good to know there. But what about if someone is buying a family member’s property and they’re not really giving them, money per se, but it’s equity in the property, how does that differ from, a gift from a checking or a savings or an investment account? 

[00:12:46] Josh Lewis, Expert Mortgage Broker: It really doesn’t, but conceptually, let’s make sure everyone understands.

So let’s say that my mom owns a house that’s worth $500,000. She owes $200,000 on it, and she wants to sell it to me, and all she wants is to pay off her mortgage. So she sells it to me for $225,000. So that pays off her mortgage, pays all the closing costs. 

I can do it that way. I can buy it from her for $225,000. Make a down payment. Pay all my own closing costs. Or we can do it as a $500,000 sale with a $275,000 gift of equity. What is the benefit to the gift of equity? Now it looks like I made a 55-60% down payment. I don’t have mortgage insurance. I don’t have to come up with any of my own funds for a down payment or closing costs.

So if a gift donor has a substantial amount of equity in a property and they’re willing to let you have that property for less than it is worth. We can use that equity as a gift to you to increase your down payment to eliminate mortgage insurance and to prevent you from having to come in with any cash to close.

So those are your two options. An actual gift that preferably is a wire, but it’s actual good funds that you can show in an account that gets transferred to you. Or it can simply be done with equity. And equity is very simple to prove the donor’s ability to gift because we have the preliminary title report and the appraisal that says they’re the owner, and we have the estimated closing statement that says, here’s what they owe on the property. And the appraisal says there’s that much equity. 

Different kind of documentation, but actually pretty simple and a super cool way for a family member who doesn’t need every nickel out of a property to get you into something at a lower cost without having to come up with any cash. 

[00:14:26] Jeb Smith, Huntington Beach Realtor: Good stuff. So now when you just mentioned a word that I wanna talk about cash. Say for example, people that do have mattress money, for example, kids buying a property now and we want to give them this cash to be able to buy a home. Is that acceptable with any type of loan program and what needs to be done in order to make it acceptable if it’s not?

[00:14:46] Josh Lewis, Expert Mortgage Broker: It can be acceptable. In practical terms with today’s home prices, it makes it really difficult. We used to do this a hundred years ago when I started doing loans in the nineties. A typical FHA transaction for US, Anaheim, [00:15:00] California, right near Disneyland. You could buy a three bedroom, one bathhouse for about $120,000.

So your FHA down payment is less than $5,000. And you can get the seller to cover all of your closing costs in that market at that time. So to show that someone saved $200 a month for 25 months, you basically have to show a household budget. Show how they saved that, a letter from them explaining why they prefer to not save the money in the bank and document.

Those guidelines haven’t changed. But what has changed is that $120,000 house is now a $700,000 house. So documenting that someone had the budget and his ability to save 20, $30,000 at home over a timeline is more difficult. So if you have cash on hand, I would not say that it’s impossible. I will say it will limit our options of loan types and lenders that we can take your loan to.

So if you know you are going to be buying a home, it’s a good point here, Jeb, for us to talk about the seasoning of those funds. If you put a hundred thousand dollars cash in your bank account today, once we get through two and a half months, so two full billing cycles, we’ll have two statements that don’t show that deposit on there, and those are sourced and seasoned.

Again, lenders don’t go back and forensically look at your bank accounts for the last year to see where the money came from. They look at the last two months to see if there were any large deposits that need to be seasoned. Cash can be used. As I said before, I would be naive to think that on conventional loans, I don’t have borrowers that have cash and they’re like, “eh, hey dad, will you give me back this $20,000?”

And dad can put it in the bank account and wire it over to them. It happens. I know it happens. With an FHA loan, that wouldn’t be possible cuz we would need to get dad’s bank statement and it would show that he didn’t have the money. 

[00:16:43] Jeb Smith, Huntington Beach Realtor: Good stuff. In a moment we’re gonna talk about how loan programs vary with regards to gift funds, but you mentioned gift letter a moment ago, and that being part of, the sourcing of funds. Is there a formal gift letter? Do you need to write it down on a piece of paper? And if so, what goes on that gift letter that makes it something that a lender would actually accept. 

[00:17:03] Josh Lewis, Expert Mortgage Broker: So none of the agencies actually have created a form that says you have to use this letter. In their guidelines, it strictly lists out what has to be included in that letter.

So it has to document who the recipient is, you. Who the donor is. Your relationship to them. All of their contact info. And the reason for that is like your situation, Jeb, that file got audited six months, 12 months later down the line. They need to be able to contact the donor. So they’re gonna want name, address, email, phone number, so they can track those people down.

They wanna know the amount of the gift. They wanna know when the gift is gonna be given. Already given, gonna be given at close of escrow. They wanna know the account that it’s coming from. So we say Chase bank account 123456. All of that stuff. 

The single most important thing that has to be in that gift letter is that no repayment. This is a true gift. No repayment is expected or implied. That’s really what they’re looking for. [00:18:00] So it establishes that there’s a person who has a valid relationship to you that is going to give you funds from this account at this time, and there is absolutely no repayment required. 

[00:18:10] Jeb Smith, Huntington Beach Realtor: Got it. Okay. And while we’re on that topic, Josh can you borrow gift funds?

[00:18:16] Josh Lewis, Expert Mortgage Broker: Really the only situation where this would come into play is on an FHA loan where we have to document that you have those funds. And FHA says Yes, that is allowable, but we have to document that the borrower is not obligated on that loan. So you go out and borrow $20,000 to help your sister buy a house, Jeb, we just have to show that your sister’s not obligated on that loan.

If you’re a nice guy and you’re willing to pay on the $20,000 loan for the next 10 years so that she can have that down payment, it’s acceptable. We just have to document that loan and show that she’s not liable on it to basically be your proof of funds. 

[00:18:53] Jeb Smith, Huntington Beach Realtor: Got it. So Josh, this is where I’m gonna throw myself under the bus a little bit.

So in, in buying the house that I have now with my wife in 2012 is when we purchased the property we’re in now. So just over 10 years ago. We, at the time, didn’t have the funds for the full 20% down and I quote unquote borrowed the money from mother and father-in-law.

Part of the money, right? I think half of it. We put in half borrowed the other half. The half that we borrowed was technically a loan. And that was to be repaid over an extended period of time or what have you. I will say most people listening to this get the idea of where we’re going.

Clearly it’s in that gray area of the guidelines or could even be in the black area, the guidelines where it’s technically not allowed. But I do know a lot of people out there, that’s going to be the direction they have to go. If that’s the case, the gift letter just has to say, like Josh said, that there’s no repayment involved and in theory you’re good to go.

Now Josh isn’t listening to any of this, so he took his headphones off, but Josh put them back on now so we can talk about, explain gift funds on different types of loan programs. So we’ve talked a little bit about FHA. We’ve talked a little bit about conventional, but let’s go into a little bit more detail and also include VA, USDA, all that good stuff.

[00:20:10] Josh Lewis, Expert Mortgage Broker: Jeb let’s go back to your scenario though for a second. 

[00:20:12] Jeb Smith, Huntington Beach Realtor: You were listening. 

[00:20:13] Josh Lewis, Expert Mortgage Broker: I was listening. I was sneaking to listen. Here’s the reality. Your gift donor signed a letter that says No payment is required. I am giving Jeb and his wife these funds on this date, and there is no repayment required. They signed their name to it. 

You may have had a verbal agreement that you were going to repay them, but you could show up in court at any point in time and go, wait, I’ve got this letter. It says right here, it was a gift. They can claim that I verbally told them different, but I say that I didn’t. And the only thing we have here in writing says that it is a gift.

[00:20:48] Jeb Smith, Huntington Beach Realtor: So you’re saying I didn’t have to repay them? 

[00:20:50] Josh Lewis, Expert Mortgage Broker: You did not have to repay them. Would have made Christmases awkward but you did not have to repay them. And again, from a lender’s perspective, they don’t want that. They want it to be legit. They want it to be [00:21:00] what it is. What they are looking for is they don’t want it to be a loan where there’s repayment terms.

So in your situation, Jeb, they didn’t say, “Hey, you’re gonna pay us $500 a month.” Because if that had been the case, we would have a problem cuz there’s an undisclosed debt. But in your situation, they said, “Hey, someday you’re gonna be in a different situation. There’s gonna be equity in the property, you’ll have some money and you’re gonna give this money back to us. But we don’t really care when it happens.” 

So from that perspective, you’re not doing anything that’s putting the lender in a bad position. So if it’s that type of situation, I don’t think it’s that big of a deal because you legitimately legally have the ability to show up in court and say, I don’t have a debt, and that is what the lender is looking to do.

So in a perfect world, let’s not do that. Let’s make these be legitimate gifts because by the actual letter of the law that is what it is supposed to be. But to your point, Jeb, you were asking about specific types of loan programs. And again, the scope of our conversation today is people buying a home to live in as their residence.

Back in the day, Fannie and Freddie required you to have a minimum borrower contribution. So you could get a gift, but you had to have some amount of your own funds. Unless you had a full 20% down, which in most situations then it could all be a gift. So because that is the way that it was, that myth persists that it started with an actual truth and fact, and now it just lingers on.

Fannie and Freddie no longer have those requirements. You do not have to make. Any contribution on your own, all of your funds can be a gift. FHA has always been that way where funds can always be a gift. VA never had a requirement cuz you never had A down payment required. The seller could pay all your closing costs.

The gift could cover all your closing costs. So from all of those situations, any of the programs you are gonna be using other than jumbo loans are going to look at this the same. They’re gonna have little nuances and subtleties to what you have to do. Kinda like we talked about sourcing the funds, not sourcing the funds, but they’re all gonna be okay with gift funds.

So that leaves us, believe it or not, we do have first time buyers or buyers getting a gift and going and taking out a jumbo loan. I’ve had people buy $3, $4 million homes and the parents were nice enough to give them $2 or $3 million as their down payment. So they’re getting a jumbo loan. Jumbo lenders are all over the place. 

Many of them are just like investment properties and they say, no dice, no gift. It’s gotta be your own funds. Some of them will say you have to have some of your own contribution. Some of them basically follow Fannie Freddie guidelines and will say, don’t care. It can all be a gift.

So if you’re looking at the jumbo loan, it’s going to be case by case and you need to make sure that your loan officer doesn’t think that the big down payment is all yours, that it’s coming from a gift. So they can verify that the lender or investor that’s buying that loan is okay with gift funds. 

[00:23:46] Jeb Smith, Huntington Beach Realtor: No good stuff. Now let’s talk about one of the biggest myths around gifts. Something that you and I have addressed several times. And that’s the idea that the gift, somebody doesn’t want to give another party a gift because they’re going to be taxed on it, or the person [00:24:00] receiving the gift in some way is going to be taxed.

So what does the IRS state about gifts and taxing, exclusions, that sort of thing. 

[00:24:09] Josh Lewis, Expert Mortgage Broker: So you understand why people would ask the question, but let’s look at this. I am not going to get taxed on receiving a gift cuz it’s a gift. It’s not income. I didn’t earn it. It’s already been taxed. Someone had the money and they gave it to me. So we know I am free of any taxes. 

Now the gift donor, this is the one that’s crazy to me. People say they’re gonna get taxed if they give me more than the annual gift tax exemption. So last year, Jeb, what, it was $16,000? For 2023 it’s up to $17,000. That any individual can give any other individual every year without impacting their lifetime estate tax exclusion whatsoever. 

Now, Jeb, I don’t have the number at hand here, but what’s the lifetime gift tax or the lifetime estate tax exemption now? Is it like $12 million, $11 million? 

[00:24:54] Jeb Smith, Huntington Beach Realtor: It’s over $10 million, I know that. I don’t know what the number is, but 

[00:24:57] Josh Lewis, Expert Mortgage Broker: It’s a monster number. I have had a handful of clients who have to think in those terms of their long-term planning, but here is what happens. Let’s say you are the only child of a widowed mother. So she has the money and she wants to give you $200,000 to buy a house. In 2023, $17,000 of that, no problem.

So now we have $183,000 that some people go, oh, there’s a tax consequence of that. There is, but it’s not what you think. That $183,000 comes off that 10, 11, 12 million lifetime estate tax exemption. So it means that she needs to file with the IRS and say, “Hey, I gave my daughter this.” And it’s noted in the ledger over there, but only if she passes with an estate valued what is that?

Eight figures, seven figures, eight figures, Jeb? Up into the eight figures. 

[00:25:47] Jeb Smith, Huntington Beach Realtor: Higher than I could count. That’s why I couldn’t help you. 

[00:25:50] Josh Lewis, Expert Mortgage Broker: Only in that situation would it ever come into play. So for me, for Jeb, for most people I know anyone that would give us a gift is not gonna be impacted in any way.

Doesn’t mean that we still don’t have gift donors who have that concern and we have to document this. We have to show them IRS publications, popular press, the Wall Street Journal, Money Magazine, where they go through and break this down to convince them that they’re not going to have a problem.

Now Jeb, one of the things that’s worth talking through in this situation, we’ve already talked home prices are high, we regularly have gifts of $30, $50, a hundred thousand dollars that exceed that $17,000. But if you’re giving it to your son and daughter-in-law, and you are a husband and wife, each of you can give each of them $17,000 a year.

So in that situation, mom gives son and daughter-in-law $34,000 combined. Dad gives son and daughter-in-law. $34,000 combined. So $68,000 there without impacting that lifetime estate tax exemption. Now, let’s say there’s three grandkids involved. Technically, those grandkids can each also get two gifts of $17,000.

If mom and dad then. [00:27:00] The mom and dad the parents of the grandchildren decide we’re gonna confiscate those funds and buy a house. I don’t think the IRS is gonna dig in too deeply as to what happened with those funds that were gifted to the grandchildren. Just don’t tell the grandchildren it ever existed. Otherwise they might turn 19 and sue you for the money that was misappropriated through the years. 

[00:27:18] Jeb Smith, Huntington Beach Realtor: No, I think more importantly, obviously joking around a little bit here, but just if you’re working with somebody that understands gifts, how they are required to be reported to different lenders and how the IRS looks at some of this stuff. You’re gonna be in good hands and they can guide you in the right direction. 

But what if you’re talking Josh to parents that want to give a gift to a child but don’t have the ability per se, because they don’t have it in cash on hand. Say I have a lot of equity in a property. I want to give my children some equity, if you will to buy a property, but it’s not on hand.

What are the options for that said, parent, grandparent or, family member or what have you? 

[00:27:54] Josh Lewis, Expert Mortgage Broker: So we talked about borrowing funds before to give a gift. If it was okay, then it’s okay here. What we’re gonna go through in terms of a property, it’s a secured loan. Even, and we’ve talked about this blew your mind before, Jeb.

If mom has a free and clear classic auto that’s worth a hundred thousand dollars and she wants to borrow $50,000 against it, it’s a secured loan. She absolutely has the ability to do that. If you wanna borrow from a rental property, borrow from a residence, borrow from anything that you own. A secured loan is always a valid source of funds, valid source of funds for sourcing for a gift.

So depending on where their current financing sits. If a cash out refinance makes sense, if a home equity line of credit, if a home equity loan, a second mortgage makes sense. Those are all gonna be valid sources of funds. So with that said, Jeb, like what I will say almost all of the topics that we talk about, someone could come up with an idea of how they can circumvent the rules and the guidelines, but gift funds are an area where there’s lots of wiggle room where you could play fast and loose with the rules.

What I will say is, It is not worth it. Follow the rules. Plan with your mortgage advisor ahead of time, because there’s always a workaround. Even if it means, “Hey, I need to wait 60 days to season. Some funds in the bank, 90 days to season funds in the bank.” Never worth it to cause a problem by doing things in the file that you are stating things that are untrue, basically everything in that file is going to be there and can be audited going forward. 

And your mortgage documents are a legal contract. So this stuff, it’s very easy to work through these guidelines and do it above board. So just talk through it. Don’t try to do anything, on the side and not letting your team of advisors know, because we can walk you through this. There’s always a solution to sourcing funds from a gift or a family member. 

[00:29:51] Jeb Smith, Huntington Beach Realtor: And if you need a lender to talk to, a mortgage professional out there anywhere in the country, there is a link in the description below. You can go check that out. Happy to make that [00:30:00] referral to you, to someone we know, and trust that can guide you to that process.

Discuss the idea of gifts, discuss the idea of refinancing, pulling cash out if have a parent or family member that is going to give you that gift that doesn’t have it on hand. But in the meantime, let us know what you want us to cover. We talk about everything on this channel in helping you become The Educated Homebuyer.

So if there’s something we haven’t covered that you wanna know more about, do us a favor, reach out our contact informations in the description below. But until next time, 


[00:30:29] Josh Lewis, Expert Mortgage Broker: and Vaya con Dios!.

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