Using Gift Funds For House Down Payment

In this article, we will discuss and cover using gift funds for house down payment. Many mortgage programs allow you to use a gift for some or all of your down payment. However, there are strict with using gift funds for house down payment. Gifts for mortgage down payments can only come from approved sources. You must prove that the money comes from an acceptable source. Gifts are funds that do not have to be repaid. It’s important to understand what kind of down payment gifts are acceptable for mortgage lenders and how to document these funds.

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Acceptable Sources of Gift Funds

You can’t use gift funds from just anyone for your down payment. People who would benefit from your home purchase, like the seller, real estate agent, or mortgage lender, cannot gift your down payment. Acceptable sources of gift funds include:

  • Close family or friends
  • Employers
  • Local government
  • Charitable organizations
  • Employers

Note that seller concessions are not the same as gift funds. Sellers can contribute toward your closing costs up to certain limits. You document seller concessions in your real estate purchase contract.

Related: Down Payment Assistance Mortgages

How to Document Gift Funds

When you apply for a mortgage with a gifted down payment, you have to prove three things:

  • The money is a gift that you don’t need to repay.
  • The donor has the money to give you.
  • The money has been transferred to you.

To prove these three points, you’ll need a paper trail. First, you need a signed letter from the donor stating that he or she is giving you money for your down payment and that this money is a gift and not a loan. The gift funds letter should include the gift amount and the donor’s name, address, telephone number, and relationship to you. Then you’ll add paperwork showing that the money has been transferred to you — for example, a receipt from your escrow officer, a copy of the donor’s check and your deposit slip, or a wire transfer from your bank.

Using Gift Funds For House Down Payment On Conventional Loans

For conventional (non-government) loans, the lender must verify that there is enough money to cover the gift in the donor’s account or that the money has already been transferred to you.

Acceptable documentation includes:

  • Copy of the donor’s check and your deposit receipt
  • Copy of the donor’s withdrawal slip and your deposit receipt
  • Receipt from the title company
  • Copy of the check from the donor to the title company

If the donor gives the money directly to the closing agent, the money must take the form of a certified check, a cashier’s check, or other official checks.

Using Gift Funds For House Down Payment On FHA Loans

For FHA loans, the documentation depends on where the money is when you apply. If the money has been transferred to you already, provide a copy of the withdrawal document showing that the money came from the donor’s account, and your deposit slip and bank statement showing the deposit. If the donor is giving you a check to bring to your closing, you’ll need a statement showing the money in the donor’s account, the withdrawal slip, and a copy of the official check. And if the donor is sending an electronic transfer, you need a copy of the transmittal.

Alternatives to Gift Funds 

Not everyone has a fairy godmother to wave a wand and give them a mortgage down payment. If you don’t have someone to give you a down payment, don’t worry. There are other options.

Down Payment Assistance

Down payment Assistance, or DPA, comes from homeownership programs administered by charitable organizations or local government agencies. Nearly 90% of the properties in the United States qualify for down payment assistance in some form according to RealtyTrac. In 2015, the average DPA in the US was almost $12,000.

Seller-Paid Closing Costs

Most mortgage programs allow home sellers to cover some or all of your closing costs. It makes little difference to sellers whether they pay 5% of the purchase price in closing costs for you or accept an offer that’s discounted by 5%. But it can be much better for you to pay full price and negotiate closing costs instead. For example, your seller could pay for single-premium mortgage insurance and you’d save hundreds of dollars each month.

Borrowed Funds for Closing Costs and Down Payment

Most mortgage programs do not allow you to borrow your down payment. But you can take out a personal loan months before applying, put the money into savings, and use those savings for your down payment. After 60 days, all the funds, even the borrowed ones, become personal savings.  Make sure that you disclose the loan on your application and list the monthly payment in your obligations.

Add an Account for Reserves

Some mortgage programs require a minimum amount of reserves or consider reserves when deciding to approve or decline your application.

Some mortgage programs require a minimum amount of reserves or consider reserves when deciding to approve or decline your application. “Reserves” are savings that can be used to pay your mortgage if you have an interruption in income. Lenders measure reserves in months. If your mortgage payment is $1,000 per month, and after closing, you’ll have $2,000 in savings, you have two months of reserves. If you have a friend or family member willing to add your name to one of their savings accounts, that can improve your loan approval chances. Do this at least 60 days before applying for a home loan. Your friend will have to sign a letter saying that you have access to the funds in the account.

Using Gift Funds For Down Payment On Home Purchase Depends On Mortgage Loan Program

Conventional loan programs and FHA loan programs have different types of requirements when it comes to gift funds. FHA and other government-backed mortgage programs allow borrowers to use gift funds for 100% of their down payment. For most conventional loans, buyers who put at least 20% down can use gift funds for their entire down payment, even for a multifamily property or second home.

Homebuyers with Less than 20% Down Payment on Conventional Loans

Buyers with less than 20% down and purchasing a single-family primary residence can also use gift funds for 100% of their down payment. Buyers of second homes and multi-unit property must make a 5% down payment from their own funds. After the minimum borrower contribution has been met, gifts can be used to increase the down payment or cover closing costs and reserve requirements. Gift funds are only allowed for primary and second homes and not investment home financing.

Problems With Using Gift Funds For House Down Payment

There are a few downsides to using gift funds for a mortgage down payment. Not every donor wants to provide their bank statements to the lender because of privacy concerns. In that case, they can gift you the money before you apply for a mortgage. Wait until you can provide 60 days of statements showing the money in your account and your friend won’t have to do a gift letter or bank statements.

Bank Statements on Using Gift Funds For House Down Payment

Remember that mortgage underwriters will only ask for 60 days bank statements and any deposits prior to the 60 days will not be questioned. Do not provide statements showing the gift deposit. Wait until you have two months of statements with the money already in the account. Another potential problem is gift taxes. There is a limit to how much people can give you without being taxed on the gift. In 2021, that limit is $15,000. If a nice person wants to give you more than that, you can help him or her out by paying the gift tax. See Fannie Mae Gift Funds Guidelines.

Using Gift Funds For House Down Payment and Closing Costs

Using gift funds for down payment on home purchase are allowed on government and conventional loans for the down payment and closing costs:

  • FHA, VA, USDA, Fannie Mae, and Freddie Mac allow gift funds to be used
  • However, there are rules and regulations with regards to gift funds
  • Each loan program has its own lending guidelines on gift funds
  • One of the major things mortgage underwriters will scrutinize is whether the gift funds are an actual gift and not a loan
  • Gift funds need to be a gift by a family member and cannot be paid back
  • Many families help each other out
  • For example, a parent may give their children gift funds to purchase a home
  • A grandparent may give their grandchild gift funds to be used towards the down payment of their home purchase
  • A couple may get gift funds as their wedding gift from family or close relatives where they can use that as a down payment for their home purchase

How Underwriters View Gift Funds For Down Payment On Home Purchase

Mortgage underwriters are the folks who will analyze the borrower’s mortgage application. Underwriters decide whether to issue a mortgage loan approval or mortgage loan denial. The mortgage underwriter is probably the most important person in the mortgage approval process. This is because ultimately, the more underwriter is the person who issues the clear to close.  Gift funds that can be used for both the down payment and closing costs. However, seller concessions and lender credit can only be used for closing costs. A clear to close means that the mortgage lender is ready to fund the loan.

What Will Mortgage Underwriters Review While Underwriting A Loan Application

Mortgage underwriters will review the following:

  • credit
  • credit scores
  • credit history
  • past bankruptcy
  • past foreclosure
  • past short sale
  • divorce decree
  • child support payments
  • alimony
  • income
  • assets
  • all other liabilities

Occupancy Type on Government Loans

All FHA Loans and VA Loans are for primary owner occupant homes only. Homebuyers can only use gift funds for owner-occupant residences only.

All FHA Loans and VA Loans are for primary owner occupant homes only. Homebuyers can only use gift funds for owner-occupant residences only. To qualify for a mortgage with a mortgage company with no overlays on government and conventional loans, please contact us at Capital Lending Network, Inc. at 800-900-8569. The team at Capital Lending Network, Inc. is available 7 days a week, evenings, weekends, and holidays.

Using Gift Funds For House Down Payment And Closing Costs

As the cost of homes keeps rising, we have seen more and more borrowers use gift funds. In this blog, we will detail how the gift fund process works as well as some agency guidelines surrounding the use of gift funds. If you are in the market for buying a home, you know the down payment and closing costs can add up quickly. While it is a misconception that you need 20% down to purchase a home, even coming up with 3.5% or 5% can be daunting. Many first-time homebuyers rely on family members to help them with the down payment and closing costs. The use of gift funds is becoming more and more popular. In this article, we will jump into specifics.

Using Gift Funds For House Down Payment and Closing Costs: Gift Funds Explained

First, let us define the term “gift funds”. The word “GIFT” is part of the phrase for a reason. The gift-giver is sending money to a homebuyer without the expectation of being paid back. This is a true gift and there is no repayment associated with the money received. If the gifter plans on being paid back, that is no longer a “gift” and that is a “loan”. If you’re using a “loan” for funds to buy a house, the lender will be required to factor that repayment amount into your overall debt to income ratio. In many scenarios, this could hinder your qualifications. This is why the use of gift funds is so common, there is no payment associated with the money received. Hence the word gift.

Own Versus Using Gift Funds For House Down Payment And Closing Costs

Many realtors are familiar with the gift fund process because it is so common. In 2020, 58% of homebuyers came up with their own down payment for a primary residence. That leaves 42% utilizing down payment assistance, local assistance programs, or gift funds. Many first-time homebuyers utilize gift funds because they do not have the ability to sell their current home and utilize that equity to buy their next home.

Becoming A Homeowner

Getting into the housing market can be difficult but can create long-term wealth stability. A common example is selling your first home as your family grows and using the profits for the down payment on a larger home. Then many years down the road, it may be time to downsize, and that profit can assist with a stable retirement. This example ties into the American dream of homeownership.

Using Gift Funds For House Down Payment: How Gifted Funds Used In A Home Purchase Transaction

How do you use gift funds? Gift funds are used to increase your available assets to buy a home. These funds may be utilized for a down payment, closing costs, or a combination of the two. The gift can only come from two specific groups. A family member (which we will go into more detail about soon) or a government agency.

How Using Gift Funds For House Down Payment From Family Members

Family member -You must have a documentable relationship with the gifter. Usually, a family member is the path of least resistance. Your lender will be required to confirm your relationship with the gifter. The gifter will also sign a letter that indicates the money is a gift and there is no expectation of repayment. The letter must also document the relationship between the gifter and the giftee.

Using Gift Funds For House Down Payment And Closing Costs On Government Loans

Government agency – Government agencies often provide down payment assistance to help first-time buyers (and repeat homebuyers) get into the housing market. Typically, this is done through local governments trying to boost their economy by growing the local population. A government agency will also sign a clear gift letter stating no repayment is expected.

Down Payment Assistance Mortgage Programs

Many down payment assistance programs are not gifted funds through a government agency, but they are a standalone second mortgage on the property.

Many down payment assistance programs are not gifted funds through a government agency, but they are a standalone second mortgage on the property. If you are utilizing a government agency, it is important to know the difference between the two. Most of the time there is a prepayment penalty or a balloon payment required for down payment assistance programs through government agencies. 

How Are Gift Funds Used In The Mortgage Process And Acceptable As Qualified Funds

Now we will dive into the nuts and bolts of the gift fund operation. Utilizing gift funds seems easy enough but there are quite a few required documents. The lender is required to document evidence of the gift. The lender is required to see the gift-givers bank statement to show there are sufficient funds in the donor’s account to be able to provide the gift. The lender may also ask for the banking documentation to verify the gift funds have been transferred to the buyer’s account.

Seasoned Funds When Using Gift Funds For House Down Payment

The lender must verify the funds in question are also “seasoned”. What does seasoning mean?  Seasoning means the assets must be in the account before the gift is given. Meaning the gifter cannot go get a loan to borrow the money to send as a gift, but it must be their own seasoned and verified funds. The funds must be available in the account in question. The lender cannot see a large deposit into the gifter’s account, as that will not pass seasoning requirements. 

Gift Letter

Gift letter – A lender is required to obtain a signed gift letter. A gift letter must be clear and contain certain pieces of information. Information required is below:

  • The total dollar amount of the gift
  • The address of the home being purchased with the gift funds 
  • The name, address, and phone number of the donor
  • The donor’s signature
  • A description of the relationship to the borrower
  • The borrower’s name and signature
  • The letter but specifically state that no repayment is required

Gift Donor Guidelines

Who can give you a gift? This is a very important question. Your only options are a government agency or a family member. According to Fannie Mae and Freddie Mac, a family member is deformed as a:

  • Parent 
  • Children – including adopted, staff, and foster children, a sibling
  • A grandparent
  • Aunt or uncle
  • Niece or nephew
  • Domestic partner
  • In some instances, a fiancé

As mentioned in this article, you must clearly define your relationship with the gifter in your gift letter. Underwriting may ask for additional documentation to verify the relationship.

Gifted Funds Needs To Be A Gift And Cannot Be Loan: It Cannot Be Repaid Back

Many clients ask if they can pay back the gifted amount. The answer to this scenario is NO. As stated above, this is considered a gift, and no repayment is necessary. If you are going to get the money from a family member as a loan, we must include that loan payment in your debt-to-income ratio. Technically, paying back gifted funds is considered mortgage fraud. It is important to understand you are liable for the monthly payment if you are paying back gifted funds. The easiest way to avoid mortgage fraud is, to be honest with your loan team. Your loan officer is on your team and is looking out for your best interest.

Lender Overlays On Gift Funds

Many lenders have lender overlays when it comes to the use of gift funds. A very common overlay is not allowing gift funds below a credit score below 640. The good news is, Capital Lendinig Network, Inc. does not have lender overlays on any of their mortgage programs. We will go directly off agency guidelines when we are dealing with gift funds. Please understand that each agency has slightly different rules for gift funds. Follow the general rules from this blog and you will be good to utilize gift funds with our team. Having an educated mortgage team is very important when choosing a lender.

Peter has 7+ years of experience in residential lending. He is a licensed Realtor in the Chicagoland area.