Gift Funds For Down Payment and Closing Costs For a Mortgage

This  guide covers gifts funds for the down payment and closing costs on a home purchase. HUD, the parent of FHA, USDA, the Veterans Administration, Fannie Mae and Freddie Mac allow gift funds for the down payment and closing costs on a home purchase.  Dustin Dumestre, President and CEO of F-1 Lenders and an associate contributing writer of GCA Forums and Sub-Forums says the following about gift funds:

The Federal Housing Administration allows a home buyer applying for an FHA loan to get 100% of their 3.5% down payment on home purchase via gift funds from a family member or relative.  The Veterans Administration  and the USDA allow gift funds on the closing costs on a home purchase. Fannie Mae and Freddie Mac allow gift funds on conventional mortgage programs. 

But depending on the lender, the gift funds may be limited For example, for conventional loans that require a 5% down payment, 3% of the down payment may need to be the home buyer’s own funds and the 2% can be gifted. Many first time home buyers do receive gift funds from family and relatives. Gift funds is becoming more popular. However, there is a proper way of how to donate gift funds to the home buyer. We will be discussing on how the mechanics of gift funds work throughout this guide.

Mechanics of Gift Funds for The Down Payment on a Home Purchase

If you are getting gift funds for the down payment on a house purchase, the funds need to be documented if the donor is gifting you the gift funds within a 60-day window. If the donor is giving you a gift two or more months before you get home, you do not need any documentation

• For example, say your parents are giving you a $10,000 gift towards the purchase of a home
• If you deposit the $10,000 into your bank account and the gift funds have been seasoned for at least 60 days, it is not considered gift funds and no red tape is required

The lender will consider it as your own funds and the gift funds do not need to be sourced.

Own Funds Versus Gifted Funds

If a family member wants to gift you the down payment and closing costs, you can deposit it in your bank account and let it season it for 60 days. By letting it season it in your own bank account for 60 days, the mortgage underwriter will not ask for a paper trail on the gift funds or a gift letter by the donor:

• This is because most lenders only require 60 days of bank statements
• Any funds in your bank account that has been seasoned for 60 days does not need to be sourced
• The funds were already seasoned in your account 60 days so documentation is not necessary
• However, if you just entered into a real estate purchase contract and you are expecting gift funds to be used for the down payment from your parents, then the gift funds must be sourced and a gift letter is required
• You cannot deposit cash into your account from your parents or randomly deposit cash into your bank
• By doing so, you cannot use undocumented cash deposits as a source of gift funds or down payment

Cash deposits do not count in the mortgage business.

How Gift Funds For Down Payment and Closing Costs Needs To Be Processed

A gift letter is required from the donor stating the amount of the gift, the relationship to the donor, and a statement stating that the gift is for the down payment of a house for the receiver of the gift and that is a true gift and not a loan and that the gift funds will not be repaid back to the donor.

• The gift funds donor needs to write a check payable to the receiver of the gift
• The receiver needs to make a copy of the check and deposit it on his or her account and save the deposit slip
• Get a bank statement print out after the deposit reflecting the deposit and make sure the bank statement print out is signed, dated, and stamped by the bank teller
• The donor needs to provide a 30-day bank statement showing that the gifted funds have been seasoned in their bank account
• It also needs to show the withdrawal of the gift funds leaving the donor’s account
• Many gift funds donors do not want to reveal their personal bank statements to the gift funds receiver but there is no way around this

Both donor and receiver bank accounts need to be verified this way or the gift funds cannot be sourced and used. Gift funds and non-occupant co-borrowers are not viewed favorably by the automated underwriting system. If a borrower gets a refer versus AUS approval and this borrower has gift funds, try to remove the gift funds and rerun the automated underwriting system. There are times when removing gift funds from the automated underwriting system can get an automated approval.

Frequently Asked Questions on Gift Funds For The Down Payment and Closing Costs on a Home Purchase

The following are common questions regarding the use of gift funds for the down payment and the closing costs of purchasing a house, such as:

Questions About Gifting Funds For Purchasing A Property For Down Payment And Closing Costs

What Are Gifted Funds?

Gift funds refer to financial assets in the form of money given by a relative, a friend, or another person who assists a buyer with the down payment and closing expenses of acquiring a home.

Who Can Give Gifted Funds?

In most cases, gift funds may be received from the following persons :

• Relatives (parents, aunt, etc., or even grandparents).
• Any relative or a friend.
• A nonprofit organization or an employer (on particular occasions).

Are There Restrictions On The Use of Gift Funds?

Yes, there are restrictions in most cases – the lenders have their own rules for using gift funds.

Some of the common restrictions are:

• The donor must give a gift letter stating the present’s worth and the borrower’s relationship to the donor, and the funds do not require reimbursement.
• Some lenders will ask for evidence of the source of the gift funds to ensure that they are really a gift and not a loaded loan.

How Do I Document Gifted Funds?

When documenting gift funds, it is common that you require:

• The donor issues a gift letter.
• Bank statements or other transaction records about the funds transfer from the donor to the buyer’s account.
• Either plan or any other loan offer documents required by the lender.

What is The Extent To Which Gifted Funds Can Cover My Down Payment?

In most situations, gift funds may pay for the entire or a portion of the down payment. Nevertheless, some lending programs regulate the borrower’s contribution to the down payment.

Do Gift Funds Have an Effect on my Mortgage Application?

Gift funds alone do not have any adverse implications on a mortgage application as long as the supporting documentation is properly recorded and complies with the lender’s requirements. However, lenders will look at the applicant’s financial profile, including the debt-to-income ratio and credit history.

Is There a Need to Consider Any Tax Implications by the Donor?

The donor might need to consider tax implications: The IRS permits people to gift up to a certain amount (the goal limit 2023 is $17,000 per donor for each recipient) without being subject to the gift tax. Amounts exceeding this figure may require the donor to file a gift tax return. Otherwise, this amount is preferable.

He should, however, advise the donor to talk to a professional tax consultant about his situation.

Do Any Loan Programs Accept Gifted Funds?

Gift funds are suitable for most loan programs, including VA loans, FHA loans, and conventional loans. However, every program has its own set of requirements. It is always advisable to confirm with the lender beforehand.

Is It Possible To Use Gifted Funds To Pay The Closing Costs?

The answer is yes, but those will not include the actual payment that resulted in putting a deposit down, as managing both the deposit made and the other related costs is blanket managed through proper documentation. This is done to control fraud.

What If The Funds Given To Me Are Non-Family Gifts?

The fund can indeed be a gift; this includes any amount lent by someone other than a family member. However, these can also be presumptively treated with caution, and hence, explaining correctly is necessary, which amplifies documentation as well, e.g., a gift letter and proof of the funds.

How Should I Make Sure My Lender Accepts the Gifted Funds Given Me?

To ensure an accurate pattern of restricting payments, it is advisable to have a conversation with your lender early on and mention what their requirements would most likely be when documenting. Otherwise, the funds should have a letter confirming the gift and relevant proof of funds.

Funds received as gifts can be useful for homebuyers to cover their down payment and closing costs. Knowing the guidelines and necessary documentation for a gift can facilitate a smooth purchase of a home. Keep in mind to speak with your lender, and you may want to hire other BC professionals to help you with the complexities of using a gift fund.