NYC Life

Buying a Home With Gift Money? One Rule to Remember

If you’ve traveled on an airplane recently, you probably went through a security checkpoint at the airport.  These security checks are required under federal law by the Patriot Act.  In case you didn’t know, these very same laws have provisions that require all financial institutions to document your source of funds when you buy a house or refinance a mortgage.

That’s right — the Patriot Act not only affects us in seemingly obvious ways, but also focuses on money movement. So, if you are buying a home in NYC, be aware of laws around money gifts and any fluctuation to your bank account within 60 days of closing, because each of these scenarios can potentially derail or delay your closing.

In short, the U.S. government has recruited mortgage lenders in its fight against “identity theft and money laundering, particularly as they relate to terrorism,” as the Los Angeles Times put it. In fact, lenders are required by law to ask you for the exact source of funds used for your down payment and earnest money deposit, which could include gift money.

Within 60 Days, Funds Need to Be Sourced

If you have large deposits in your bank account that occurred within 60 days of your closing, they will need to be sourced. Large deposits are classified as any deposit representing 10 to 20 percent of your normal monthly income. For example, if you earn $10,000 per month, and you had a deposit for an additional $2,000 in your bank account last month, your financial institution may be required by law to ask you to source it.

Cash Gifts From Relatives

It is also useful to know that mortgage lenders typically allow gifts from relatives on down payments for owner-occupied residences, but not investment properties. I will often ask for bank statements from borrowers planning to use a monetary gift. To comply with the Patriot Act, lenders need a copy of bank statements and the wire transfer.  When relatives (often parents) are reluctant to share bank statements with the gift recipient, accommodations can sometimes be made to provide discretion to the gift giver.

Also, note that cash gifts up to $14,000 can be made without incurring a gift tax. But, of course, there are some nuances that help avoid this rule. Read about the gift tax myth.

I had a young couple face these challenges when they bought a home last year. The couple’s mother-in-law gave the newlyweds cash for part of the down payment as a belated wedding gift, but because they received the gift about a month before closing, it caused a delay in closing and extra paperwork.

Generally, extra paperwork is required when a down payment is received as a gift — so consult with a loan officer regarding the gift.


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