Congratulations! You’re about to buy a home and you have someone in your life generous enough to help you achieve that dream. Or maybe you’re considering tugging on the old heartstrings to make that a reality. If you already have proof of income and a strong credit score, you can use gift money for a down payment on a home, but there are a few rules:
Send a Signed Statement to Your Mortgage Lender
Any gift deposit more than 25 to 50 percent of your total monthly income has to be documented in a gift letter if it’s going to be put towards a down payment. You and the donor must both clarify that the funds are a gift. This includes the following
- A signed explanation that you’re not expected to pay them back.
- The amount of money to the exact dollar.
- The type of account (savings, checking, etc.).
- The expected date of money transfer.
- Your relation to the donor.
Follow this process for each gift donation—yes, each one gets its own letter and bank account!
Leave a Paper Trail to Help the Lender Track Funds
Huge sums of borrowed cash, such as a credit card cash advance, would imply you’re not able to commit to a mortgage without racking up debt. Here’s how to validate your down payment money as a gift:
- Deposit the gift into its own account and save a receipt. The last thing you want to do is pull from multiple accounts when you’re trying to prove the source.
- Provide two months of bank statements. Some loans will also require your donor’s bank statements. Prepare full documentation.
- Send copies for verification. Photocopy the check or present paperwork verifying electronic transfer.
- Keep a record of when the gift leaves your account. Not always necessary, but good to have on hand.
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Know Your Loan Restrictions on a Gift Amount
Research how much gift money your specific loan allows to be used for a down payment. We’ve pooled a few common loan types and minimum contributions:
- For a down payment of 20 percent or more, the entire down payment can be a gift. Any less, and you must pay part with your own money.
- Gift money can only be used on primary residences and second homes (no investment properties).
FHA and VA
- The entire down payment can be gift money.
- If you have a credit score between 580 and 619, you must pay for at least 3.5 percent of the down payment yourself.
- Gift money can only be used on primary residences.
Know Your Loan Restrictions on a Gift Donor
Depending on the insurance company, the donor’s relationship to you can include the following:
- A family member, including fiancé
- Close documented friend (such as a godparent)
- Government agency providing homeownership assistance
Lenders can consider exceptions, but the gift donor can’t have an interest in the property sale. For example:
- Real estate agent
Any money given to you by these parties would be considered a reduction in the sale price and would have its own effect on mortgage loan rules.
Now that you’re ready to draw up your gift letter, here are a few important reminders:
Provide Enough Time for Transfer
Your gift letter and the deposit are required to be processed and documented before closing your mortgage.
Warn Donors About Gift Tax
Anyone can gift up to $14,000 per year tax-free. So in an ideal situation, your own parents could gift you and your spouse a joint total of $56,000 with four separate checks (one from each parent). Greater sums have to be accounted for come tax season.
Speak to a Loan Officer