Many loan programs allow you to use gift funds for the down payment. However, this does not mean you can just claim you received a gift and purchase the home. Instead, you have to follow some very specific steps in order to have the funds count.
Figure Out How Much You Can Use
The first step is to determine how much the loan program you plan to use will allow you to use for gift funds. Not all programs are the same. Following are the specific loan requirements:
- Conventional loans:
- If you put down 20% or more on the home, the entire amount can be gift funds
- If you put down less than 20% and the property is a one-unit property, the entire amount can be a gift
- If you put down less than 20% and it is a 2-4 unit property, you must put at least 5% of the purchase price down with your own funds; the remaining money can be a gift
- The home must be a primary or second home – gifts are not allowed on investment homes
- Government loans (FHA and VA):
- Your entire down payment for an FHA loan can be a gift
- The home must be a primary residence
The Donor Letter
The next step is obtaining proper documentation for the gift funds. You cannot just deposit them in your account and use them for your down payment. The lender needs to source the funds. This means you must track where you obtained them. The lender needs to do this as a precaution in order to protect themselves. They need to determine that the money is actually a gift and not a loan. If it is a loan, you might qualify for the loan still, but they have to include the payments you have to make in your debt ratio. This makes the process even more complicated. In order to document a gift, you need a letter from the person providing the funds. This letter must state:
- The donor’s name and address
- How you and the donor are related
- How much money the donor gifts to you
- The date of the gift
- A sentence stating that the donor does not require any money paid back to them
- The address of the property that the gifts are meant to be used for
- The donor must sign the letter
Proving the Deposit of Gift Funds
One of the most important factors about gift funds is your paper trail. If you don’t properly document them, you cannot use the funds. Basically, the lender needs to see where the funds originated as well as the transfer of the funds. It looks something like this:
- The donor sells stocks to provide the buyer with the down payment funds. The donor must provide the documents pertaining to the sale of the stock.
- The donor must also provide documentation regarding the transfer of the funds into his checking account (or any account he will use to withdraw the funds to the borrower)
- You must document receipt of the funds with a receipt from the bank
- You must also provide your bank statement if too much time passes between receipt and use of the funds
- Don’t touch the funds until the closing agent tells you to withdraw them
- Write a check from the same account you verified the receipt of the funds
Any steps you take to document gift funds should be very tedious and easily tracked with paper. Don’t make the mistake of doing something without a paper trail. For example, removing the funds from your checking account before you need them for the closing is not acceptable. The lender cannot trace what you did with the funds or prove where the funds came from if they don’t come directly from your account. If something does not have a paper trail, don’t do it.
People Who Cannot Give You Funds
There are certain people who cannot provide you with gift funds for your down payment. Typically, lenders reserve receipt of gifts from people who are related to you. In some cases, your employer or a charity may provide the funds. The people who cannot provide you with funds include:
- Real estate agent
- Mortgage lender
Anyone who has a financial stake in the property or the transaction cannot provide you with down payment funds.
Gift funds are a great way to help you purchase the home you desire. As long as you qualify for the loan on your own parameters, you may be able to use funds from a relative willing to help. Make sure you tell the lender you plan to accept a gift so they can walk you through the process. One missed step and you might be ineligible to use the funds to help you purchase a home. The requirements are very simple, even though they seem tedious. The closer you follow the requirements, the easier time you will have obtaining approval for funds. This could mean that you have don’t have to put any of your own money down on the home. This is the case for first or subsequent homes – there are no requirements stating that this home purchase must be your first home for any type of loan program.