1. Gift Funds – any member of your family can provide you with a gift for your home purchase down payment. There is no limit on the amount of the gift but how it is applied to your home purchase will depend on the loan program you choose.  Most conventional and Government loan programs will allow for the entire down payment to be gifted to you but there are a few programs that require a certain percentage of the down payment come from your own existing funds.  Investment property purchases do not typically allow for ANY gift funds.  Best practice is to check with your preferred lender to verify how much gift is allowable while in your home buying preparation stage so you can plan accordingly.

Some exceptions exist for non-family members to provide you with gift funds for your home purchase, such as a fiancé or godparents, but you will need to make a compelling case to the lender so that they are able to grant the exception.

There are certain IRS reporting requirements and other consideration when you and your family are considering using gift funds for a home purchase:

• In 2019, under the Annual Gift Tax Exclusion Law, the IRS reporting requirement for gift funds is $15,000 each year.  Each member of your family can gift up to that amount without having to report the gift to the IRS. This means if purchasing a home this year, each of your parents could separately gift you $15,000 for a total of $30,000 toward your down payment. Or, if they separately gift funds individually to you and your spouse you could receive a total of $60,000 toward your home purchase without triggering a report requirement to the IRS. 
• The 2019 Lifetime Gift Tax Exemption is $11.4M per individual.  This means that an individual can gift up to $11.4M over their lifetime to their family members/heirs and not be responsible for any gift taxes or estate taxes.  For a married couple, this number doubles to $22.8M.

Basically, the gift/estate taxes apply to the super wealthy and those of us buying residential homes with mortgages need not worry too much about the size of the gift we receive.  So, if your parents or other relatives are feeling extremely generous, they can provide you with gifts of $50,000, $100,000 or more to help you buy your first home and not subject to taxation if they do not exceed the lifetime gift tax exclusion limits.  The recipient of a gift is not taxed on the gift either, so it is a win-win for your home purchase.

*Please note: as the gift donor, the source of the funds for your gift could trigger some tax liability. For example, if you obtain the funds for your gift from the sale of stocks or other assets, you could be subject to Federal and State capital gains taxes or if you obtain the funds as a distribution from a retirement account, those funds could be taxed as regular income. I recommend you discuss all options with your CPA or tax advisor when considering providing a gift to a family member for the purchase of a home

2. Retirement Accounts – the two primary retirement account types we’ll cover for home purchases are 401k/403b and IRAs.  The rules are very different between the two types but leveraging your retirement account can be a very useful tool to help you become a home owner when other sources of savings are lacking.  The best source of retirement funds for home purchase is to “borrow” funds from your 401k/403b as long as the account is held with your current employer.  401k/403bs are an acceptable source of down payment for home purchase for almost all loan types as they are considered “secured” funds since you are borrowing the funds from yourself.

The rules vary slightly from one 401k program to the next but in general, you can borrow up to 50% of the current 401k balance or $50,000 whichever is lower. A 403b is a retirement plan offered by public schools and certain 501 (c) (3) tax-exempt organizations. The rules for a 403b retirement plan are similar to 401k so will just use 401k in the remainder of the article to address both.  The funds are not taxed as income and there are no tax penalties for early withdrawal because you pay back the borrowed funds with additional payroll deductions over a certain number of years. Here are some of the pros and cons if you are considering accessing your 401k to assist with your down payment.

• Pros – borrowing from a 401k costs very little if anything in fees but you will pay a small interest rate on the funds (anywhere from 4% – 6%) to help make up for the lost growth in your retirement account as the funds borrowed are not growing with the stock market.  Additionally, the amount you repay each month in payroll deduction does not count against your overall debt to income ratio in your mortgage loan qualification like an auto loan or other borrowed funds.
• Cons – there are downsides to borrowing from your 401k, so it is prudent to consider all options available to you when buying a home.  The downsides include the possibility of future taxes and penalties if your employment ends prior to paying your 401k back in full as you are taxed on the remaining balance as a distribution if you change employers or otherwise leave the position you held at the time you borrowed the funds.  Additionally, there is some potential for a future diminished retirement account as the interest rate you pay back into your 401k with your payroll repayments can be lower than if the funds had remained in your account during a bull market in stocks and bonds.

The rules for accessing funds from an IRA are totally different as you cannot “borrow” from an IRA.  You can take a distribution from a traditional IRA, Roth IRA, SEP-IRA, or a SIMPLE-IRA, however, these funds will be included in your taxable income for the year of the withdrawal and likely subject to an additional 10% tax if you are under the age of 59 1/2. Additionally, you cannot deduct the extra 10% tax as an penalty on the early withdrawal of savings.  If you need funds in the very very short term, you can take an IRA distribution and not be subject to any taxes or penalties if you reimburse your IRA account within 60 days of taking the distribution.  It may be an option to consider if you needs funds in the very short term but withdrawal from an IRA, in general, should be an absolute last resort.

*There is an important exception to the 10% early withdrawal penalty for IRAs. If you are a first time home buyer, you can withdraw up to $10,000 from your IRA to use toward the down payment and/or closing costs for your home purchase and be exempt from the 10% early withdrawal penalty. Keep in mind that you may be taxed on the withdrawal as income if it comes from a traditional IRA instead of a Roth IRA.

3. Secured Borrowed Funds – if you must borrow funds for your down payment, you can actually borrow against an asset that you own, such as a paid off car or truck.  If you own other real estate, you can access additional down payment funds by applying for a Home Equity Line of Credit (HELOC).  Any time you borrow funds for a home purchase, keep in mind that the funds you borrow, must be secured funds.

Do not take out any personal loans, signature loans, cash from your credit cards, or any other unsecured/unverifiable source (such as actual cash) and deposit these funds into your checking or savings account for your down payment – unsecured/unverified funds cannot be used toward the purchase of a home when you are obtaining financing.  

One of the downsides to this type of borrowing is that the monthly payment amount of the new loan will count against your qualifying debt to income ratio and could reduce the amount of home you qualify to purchase. It is a good idea to discuss all available options with your preferred mortgage lender so that you can make the necessary arrangements ahead of time and be ready to go when you find the right home for you and your family to purchase.