Using Gift Money For a Home Purchase
Mortgage Banker
Richard Blair
Published on August 25, 2021

Using Gift Money For a Home Purchase

Knowing These Rules About Gifts Can Take You From Renter to Homeowner

Did you know that the biggest obstacle cited by renters was saving for a down payment?  Nearly 70% of home renters said saving for down payment was the biggest reason for not buying home today. Saving cane be difficult especially if you do not have a family budget. So, one consideration is to start planning your monthly budget and look for areas that you can cut back spending and save for down payment.  One resource is Kiplinger-the link offers an easy on-line budget planner to get started.  that offers https://www.kiplinger.com/kiplinger-tools/spending/t007-s001-budgeting-worksheet-a-household-budget-for-today-a/index.php

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How to Find Information About Using gift funds

Many First Time Home Buyers are unaware that Gift Funds are a legitimate avenue for down payment. You will want to check with your mortgage banker or mortgage broker because different loan programs have their own rules, or guidelines, regarding gift money. In addition, in some instances local Down Payment Assistance programs may be an alternative. Not all mortgage companies have this program so start with a local mortgage loan originator that has great on-line reviews as a source of information. The local mortgage loan officer will have more familiarity with your state or county down payment assistance programs.

What loan programs allow gift funds for down payment

First keep in mind that there are many low-down payment programs available and in some instances programs that require no down payment. For example, the VA loan program requires no down payment. FHA loan program has a minimum 3.5% down payment and conventional loans start as low as 3% down payment. So, saving for a down payment is not as daunting as it looks- you most likely will not need 20% down payment to qualify for a home purchase.

Let your mortgage loan originator know your financial situation and how much money you personally have available for down payment. Then ask your mortgage loan originator to provide a customized loan plan, typically with at least three options, to show you the minimum down payment required based on your credit situation.

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WHAT IS A GIFT OF DOWN PAYMENT ?

Simply stated a Gift means that you have no obligation to repay the person that provided the gift money. The person giving the gift money is referred to as a “Donor.” A gift is NOT a loan. Once the donor gives you the money there cannot be any obligation or agreement to repay the Donor. Make sure to discuss with the donor upfront so there is no confusion during the mortgage approval process.

Who can give the gift – restrictions on the donor

The most important factor in determining who can give you gift money is the relationship of the donor to you. The easiest way to qualify for gift money is if the Donor is an actual family member or a blood relative. For example, a parent, brother, sister, uncle or aunt.

The second category of gift Donor would be a “family-like member.” This would be a person that is not a family member or a blood relative. For example, your fiancee or significant other. A family-like member could be someone that has lived with you for many years or someone that has played a big role in your life. For example, good family friend that you have referred to as your Uncle or Aunt and has been very involved in your life. To qualify a “family-like member” requires that the mortgage lender be able to verify document that relationship. These types of relationships are typically very difficult to verify or document and can be difficult to have approved. Make sure to discuss this situation thoroughly with your loan officer or mortgage lender upfront before you start your loan application.

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Loan programs may have slightly different guidelines surrounding gift giving so consult with your mortgage professional before transferring any money.

The gift letter

Once a family member or a verifiable “family-like member” agrees to give you money for down payment your mortgage lender will require a Gift Letter. A “To Whom It May Concern” letter from the donor will not be acceptable. There is a standardized form Gift Letter that your loan officer will provide during the mortgage application process. The Gift Letter will include the name of the Donor, their address, relationship to you, amount of the gift, and the source of the funds. In other words, the Donor must state the bank account and name of the banking institution where the funds are coming from. The Gift Letter must be signed by the Donor and the home buyer. This Gift Letter clearly discloses that the funds are a gift and there is no requirement to repay the money.   

Transferring the gift funds to the home buyer

As you have seen there are very strict rules that must be followed when using gift funds-so make sure your mortgage loan originator is helping and guiding you every step of the way. Unraveling a gift that is not documented or transferred properly can be a big headache. Like the carpenter says, “measure twice, cut once,”

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Before asking for gift funds make sure you speak with the donor and explain what will be required on their part. Some Donors do not want to provide their bank account information, and this will stop the gift from being acceptable to the lender. Let them know upfront that they will need to disclose the bank and account number where the funds are coming from and in some instances will need to provide an account statement to the mortgage lender.

There are basically three ways to transfer gift money:

  1. A transfer from the donor’s account into your bank account (especially if you are at the same bank)
  2. A cashier’s check from their account payable to you and then deposited into your account
  3. A wire transfer or cashier’s check from the Donor’s account and deposited directly with the title/escrow company. (NOTE: this is the preferred method because there is less documentation required) 

The gift money received must exactly match the gift money received

The Gift Letter received from the Donor is part of the mortgage loan underwriting process when you are approved for your mortgage. The underwriter is approving the loan based upon the exact amount funds stated in the gift letter. Sometimes you might not need the entire amount in the gift letter but since it was already documented and relied upon by the Underwriter the amount of the gift funds transferred must match exactly to the Gift Letter.

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More questions about gifts- ask our lending team

Understanding gifts and down payment can be confusing because of the different rules and guidelines. But if you are lucky enough to have a family member willing and able to help with a gift my Team can show you how to make it work. While we believe in cutting edge technology to make your home buying process easier, faster and more convenient we have not forgotten our commitment to the human touch. Personal consultations are the best way to prepare you for the mortgage process and for us to understand your financial goals. Communication throughout the mortgage process and your home buying journey is the key to enjoying an awesome home lending experience.

 

 

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