One of the biggest financial decisions that a person makes during their lifetime is the choice to buy a home. In most cases, buying a home is far less expensive than renting if one expects to remain in a chosen community for a long period of time. A lot of factors are considered if or when to make the switch from renting to buying a home, such as the job market or quality of life. Then there are times when a person just falls in love with a community and decides to set down permanent roots. Such was the case with Realtor Ron Shelton of Breckenridge Associates Real Estate, who fell in love with the town of Breckenridge, Colorado, after spending summers there while growing up. The decision to buy a home may be the right one to make, but it usually isn’t cheap. That’s why using gift money to finance a down payment is a smart thing to do.
Having only 4,763 year-round residents means that the resort town of Breckenridge, Colorado, may be small but buying a house there isn’t cheap. The median home price in Breckenridge is $423,900, which means that the beautiful views do come with a price.1 However, some basic financial rules for putting a down payment on a home and the use of gift money are pretty much the same throughout the country. When one decides on a course of action to buy a home, it’s always wise to consult an experienced Realtor, such as Ron Shelton of Breckenridge Associates Real Estate, to crunch the numbers and find out what options are available to the prospective homebuyer.
A basic rule of thumb is for a person to put down 20% of the home’s price as a down payment. Such a sum may be out of reach for many individuals, especially young married couples or individuals just beginning to make their mark, but one’s family can come to the rescue in the form of gift money. An individual can use gift money from their family to finance a down payment on a home, but there are certain factors to consider. A licensed Realtor, such as Ron Shelton of Breckenridge Associates Real Estate, will tell their clients that the type of loan used will determine how much gift money can be used for the down payment. A conventional loan, such as those that are backed by Fannie Mae or Freddie Mac, allows a person to solely use gift money for a down payment if such a payment is 20% or more. If the prospective homeowner is putting down less than 20%, then only part of the payment can come from gift money while the rest must come from the buyer’s personal funds.2
The use of gift money for a down payment can vary quite a bit. If one is getting a FHA or VA loan, then the entire down payment can come from gift money but only if the person’s credit score is 620 or higher. If one’s credit score is between 580 and 619, then at least 3.5% of the down payment must come from the individual’s personal funds.3 Qualified Realtors, such as Ron Shelton of Breckenridge Associates Real Estate, will make sure that their clients also know that there is a cap limit on how much one can receive in gift money before it becomes taxable. The Internal Revenue Service allows one to receive up to $14,000 in a year from a single individual as gift money that is tax-free.4
Realtor Ron Shelton of Breckenridge Associates Real Estate adds, “Using gift money is a smart way to finance a down payment for buying a home. Depending upon the type of loan used, gift money can be used to fully make the down payment or make up a major percentage. There are some important things to remember when deciding to use gift money to buy a home. The first is that the money has to come from relatives, not friends. Second, the prospective homeowner will need documents from the gift giver that state the relationship between the two parties and that repayment is not expected as the money is a gift. Another important consideration is that gift money can only be used to purchase primary residences or second homes, such as a vacation home here in Breckenridge. Finally, a person can only gift $14,000 to another in order to stay non-taxable, but there are some ways to mitigate this. If a young married couple are looking to put a down payment on a home, the parents of one of the spouses can write individual checks to both spouses for the $14,000 maximum amount. Thus, the husband’s mother and father can each write checks to both the husband and wife.”5
As one can see, using gift money to help make a down payment on a home is a smart decision to make. However, using gift money isn’t cut-and-dried, so consulting a licensed Realtor like Ron Shelton of Breckenridge Associates Real Estate, is a wise course of action. They can help the prospective homeowner navigate all the rules that impact the proper use of gift money for home loans. In the end, family members can help one another to be able to buy the home of their dreams through generous monetary gifts.
- Quote from Realtor Ron Shelton of Breckenridge Associates Real Estate Ron Shelton Broker/ Partner