Many loan programs today allow you to accept gift funds. It’s a great way to buy a home even when you don’t have a large down payment. Before you jump ahead and accept gift funds, though, you should know what lenders require.
What are Gift Funds?
Gift funds, as the name suggests, is a gift. Lenders allow you to receive the gift from a relative, close friend (that you can document a long-term relationship), employer, or charitable organization. The money cannot be a loan. In other words, the donor can’t expect repayment.
Proving Gift Funds
So how do you prove that the funds are a gift? It starts with a gift letter. The letter must state all of the following:
- The donor’s name, address, and phone number
- How you and the donor are related
- The amount of money the donor provided
- The reason for the gift (to purchase a home)
- A sentence stating the funds are not a loan and no repayment is expected
- The property address of the home you are to buy
- Signed and dated by the donor
The letter is just the start of what lenders need. You’ll also need to provide proof of the funds. It starts with the funds’ origination. The lender may ask for the donor’s bank statements for the account they will gift the funds. Lenders need to make sure the funds aren’t a loan. In other words, they look for recent large deposits, typically within the last 60 days.
Lenders also need a copy of the canceled check that the donor wrote to you. The check should be for the exact amount written in the gift letter. Finally, you must provide a copy of the deposit receipt when you put the funds in your account.
Lenders need this paper trail. It helps them determine if the funds belong to the donor or if there’s some type of loan activity going on behind the scenes. Be prepared to show the lender proof of the funds’ origination if they aren’t sure. For example, if the donor recently cashed in stocks, the lender may need to see a copy of the receipt for the transaction.
Who can Give Gift Funds?
Lenders are fairly vague when talking about who can give you gift funds, but in general it can be:
- Blood relatives
- Relatives by marriage
- Step relatives
- Domestic partners
In addition to family members, your employer or a non-profit charitable organization may be able to help you with your down payment.
What About Wedding Funds or Other Gifts?
You may wonder about other funds you may receive as a gift, such as wedding funds. It’s normal for the bride and groom to use wedding funds to buy a home, but timing is key here. Let’s say you got married on September 15th. You deposit the funds in your account on September 20th, and then apply for a mortgage on September 30th. You won’t be able to use those funds very easily.
Lenders want at least 60 days seasoning on funds used for the down payment. Since it’s nearly impossible to trace every check you received for your wedding, lenders want you to wait until the funds are in your account for at least 60 days. At that point, the lender won’t see the large deposit and what they can’t see, they don’t need to verify.
What Loan Programs Allow Gift Funds?
Fortunately, most loan programs allow gift funds. The amount they allow and the requirements they have may differ though:
- Conventional loans – You must contribute at least 5% of the home’s sales price for a conventional loan, but any money after that may be gift funds.
- FHA loans – As you long as you have a 580 credit score, 100% of the down payment can be gift funds. If you have a credit score of 500 – 579, you need to contribute at least 3.5% of the home’s sales price with your own money and the remaining 7.5% (for a total 10% down payment) can be a gift.
- VA loans – Any portion of the down payment can be a gift since the VA doesn’t require a down payment.
- USDA loans – Any portion of the down payment can be a gift since the USDA doesn’t require a down payment.
Gift funds are a great way to help you buy a home. Make sure you let your lender know right away if you’re getting gift funds. The loan officer can walk you through their process and help you get the funds approved right away to avoid delays.