Did you know that you can accept gift funds for many loan programs? Gift funds help you come up with a down payment on a home. Before you accept money from just anyone and throw it in your account, though, you should know the rules.
Each loan program has the same requirements regarding accept gifts for down payments. Yes, you can accept them, but you must follow the tips below.
How Much Money Can you Receive?
First, let’s discuss the amount you can receive. This varies by loan program.
- FHA loans – If you have at least a 580 credit score, the entire down payment can be a gift. If you have a credit score between 500 – 579, you must contribute 3.5% of your own funds. The remaining 7.5% (for a total 10% down payment) can be from a gift. You can also use gift funds to help with closing costs.
- Conventional loans – The entire down payment can be a gift as long as you buy a single-family property. If you buy a 2-4 unit property, at least 5% of the down payment must be from your own funds. Gift funds may also help you pay your closing costs.
- VA and USDA loans – Neither VA or USDA loans require a down payment; you can get 100% financing, but you can use gift funds to cover the cost of closing the loan.
Who Can Gift you Money?
All loan programs have the same guidelines. You can accept gift funds from family, your employer, or a charitable organization. In some cases, you can accept funds from a friend, but you must be able to document your relationship, showing that you’ve been friends for a long time. If you are unsure if someone qualifies, ask your loan officer. When it comes to family, though, all family counts including relatives by blood, marriage, and step-family members.
Documenting the Gift Funds
Here’s where you really need to pay attention. All lenders require you to properly document the gift funds. Don’t just accept money from someone and think you can use it for your loan. You must follow the proper steps, which first includes a gift letter.
The gift letter should be from the donor. It should state all of the following:
- The amount of the gift
- The reason for the gift (buy a home)
- The property address
- A statement that this is not a loan and no repayment is expected
- Signed and dated by the donor
Once you have the gift letter, the donor can transfer the funds to you. They should transfer the funds in a way that the lender can track, such as via check, electronic transfer, or wire transfer. The lender will need to see the funds leave the donor’s account and get deposited into your account. You can provide the deposit ticket or your asset statement showing the deposit.
In some cases, lenders need to track the funds provided by the donor. In other words, they need to see where the donor got the funds, to ensure there isn’t a loan in the works. If the donor sold an asset, received a windfall, or used his or her income, they should be able to document the origination of the funds.
Make sure you deposit the funds in the account you’ll use to fund the down payment and closing costs. Don’t combine accounts or use more than one account. Keep it simple from the start so that the lender can effectively transfer the funds.
Who Can’t Provide Gift Funds?
Something you should also note is who cannot give you gift funds. While the list is long regarding who can, it’s just as lengthy regarding who can’t help. Basically anyone that’s involved in the transaction can’t give gift funds. This includes the builder, seller, realtor, and lender. Anyone that has an interest in the transaction is ineligible.
This doesn’t mean the seller can’t help with the closing costs – he or she just cannot give any money for the down payment. When a seller helps with closing costs, it’s called a seller’s concession. The seller concedes some of his or her proceeds from the sale to help you with your loan costs.
Mortgage down payment funds must come from either you or an approved gift source. Lenders are very careful about who provides the down payment funds to make sure there isn’t any ‘bribing’ to buy the home. You should buy the home of your own free will and because you are financially capable of doing so. If that means getting gift funds for the down payment, it is possible, you just have to follow the rules.