ACCEPTING A GIFT FOR A DOWN PAYMENT – WHAT YOU MUST KNOW
17 May, 2021
If the lack of a down payment keeps you from buying a home, gift funds from family or friends may be an option, but only if you follow the rules.
Couples often assume they can use any gift they receive, such as monetary wedding gifts, or other large monetary gifts, but it’s not that simple. While you can use gift money in many real estate transactions, it must get approved by the lender and you must supply a gift letter.
What is a Down Payment Gift?
A down payment gift is money gifted to you from a family member, employer, or close friend (with exceptions) to use to buy a home. There should be no expectation of repayment and the amount you can accept varies by the mortgage type.
A down payment gift is any money you use to buy a home that didn’t come from your earnings or investments. Lenders must verify where the money originated and that it’s not a loan. Most gift funds require a gift letter for lenders to accept it.
How Does a Gift Letter Work?
To use a down payment gift, you must get a gift letter from the source. While there isn’t a formal way your donor must write the letter, it should include:
- The gift amount
- How the donor is related to you
- The donor’s name, address, and phone number
- The date the donor provided the funds via check or electronic transfer
- A statement from the donor that they don’t require repayment
- The donor’s dated signature
What are the Down Payment Gift Rules?
Besides the gift letter, the mortgage underwriter will need further proof of the funds including proof that the donor transferred the funds to you as stated in the gift letter.
Underwriters typically want proof of the funds either in the donor’s account or your account, sometimes both.
It’s a good idea to keep both the donor’s withdrawal slip and the recipient’s deposit slip. If the donor wrote a check, keep a copy of the canceled check or proof of the electronic transfer. The underwriter may also want to see the donor’s bank statements for the last 60 days to make sure there isn’t a loan hidden somewhere, but they always want to see proof that you deposited the funds in your account.
As far as the amount you may receive as a gift, it depends on the loan program and your qualifying factors. Some borrowers must contribute a percentage of the purchase from his/her own funds and others can use 100% gift funds for the loan.
Do all Gift Funds Require a Gift Letter?
If you were recently married, you may wonder if you must document every monetary gift you received with a gift letter.
Fortunately, that’s not usually the case. Underwriters watch the ‘big’ gifts. What defines big depends on your income and the loan program you use. Generally, a large deposit is any deposit greater than 50% of your monthly income. If you use FHA or VA financing, though, a large gift is any gift larger than 1% of the sales price.
For example, if you received three gifts for $500, $1,000, and $5,000 for your wedding and your take-home pay is $6,000 a month, underwriters wouldn’t worry about the $500 and $1,000 deposit, but they’d want documentation for the $5,000 deposit.
Who can Provide Gift Funds?
Gift funds should come from a close family member. This usually means blood relatives or relatives by marriage, including step-relatives. Employers or charitable organizations may also provide gift funds.
In some cases, especially FHA loans, you may also accept gift funds from a close friend, but you must demonstrate your close relationship to accept funds from them.
Down Payment Gifts – The Path to Homeownership
If the lack of a down payment stands between you and your dream of homeownership, a down payment gift may help. With the right documentation and qualifications, gift funds can help you realize your dream of homeownership.
Talk to us before you accept the gift funds so we can walk you through the steps to accept them the right way, including securing a gift letter and proof of where the funds originated. We have many loan programs with low down payment requirements, allowing you easy access to homeownership today. Let’s connect to see how I can help you.
Contact Valley Mortgage in Fargo, ND
If you’ve decided it’s time to buy a new home and may need the help of a gift to make it affordable, let’s talk. Our Valley Mortgage professionals are happy to walk you through your options and match you up with the perfect loan program. We have many options available for borrowers with almost any credit score, amount of equity, or home financing requirements.
Contact us for a no-obligation conversation. Valley Mortgage is the largest independent mortgage lender in North Dakota and northern Minnesota. We’ve be helping folks like you for more than 38 years. If you haven’t reviewed our website, click here. Please call us at 701-461-8450 to get all the details about home mortgages and refinancing. There’s no cost, no obligation. Valley Mortgage does all the processing right here in our Fargo, ND office.