12 Apr 2018

Learn how to buy a home with gift funds

Remember when you were little and Grandma or Grandpa asked you what you wanted for your birthday? You likely handed them a JCPenney or Sears catalog with one or two (or 10, if you’re being honest) dog-eared pages of toys you’d like to add to your growing collection.

These days the answer to that same question is probably a little easier: You’d like cold, hard cash. Why? Because being an adult is expensive, Grandma. And because you’ve been dying to give your roommate a 60 day notice and get your own place.

Using gift funds to purchase your first home? Then you need our guide.

Who can you receive a gift from?

If you’re going the Fannie, Freddie, or VA Mortgage (conventional loans) route, the gift can come from an immediate or closely extended family member only, i.e., this is not the time to pick your Mom’s brain about rich distant aunts or uncles that may or may not exist.

On the other hand, If you’re going with a FHA mortgage you have more options. You can receive gift money to use towards a down payment from the following:

  • Family or close extended family
  • Employers*
  • Labor unions*
  • Government agency
  • Nonprofits that provide assistance to first-time home buyers.

*Check the HUD guidelines and be sure to talk to your lender about gifts from your employer or labor union.  Learn about loan types available here.

Yeah, but what’s the catch?

No catch here, just a few specifics:

  • For conventional loans, your entire down payment can be from a gift. Cue your happy dance.
  • For VA or FHA loans all of your down payment can be from a gift. However, if your credit score is less than stellar some lenders may require you to fork over some cash, too. Just check with your lender. Beef up your credit score with these tips.

Gift letters

Suppose Aunt Doris was feeling a little generous last Christmas and gave you a check for $5000. How do you apply this towards your down payment?

You’ll need your benevolent Auntie to fill out some paperwork. Owning a home is a big responsibility and banks will want to make sure that any gifted funds you’re coming to the table with aren’t actually loans disguised as gifts. The gift letter needs to include:

  • Donor’s contact info and relationship to the borrower
  • All gift specifics— the exact dollar amount, date the funds were transferred, and the address of the home the borrower intends to purchase using the funds

Make sure sweet Aunt Doris signs the letter and also states that the gift funds are indeed that, i.e., she doesn’t intend to come collecting on those funds at your next family reunion.

Odds and ends

Let’s go over a different scenario, shall we? Say you just got married or graduated college and you welcomed quite a bit of cash from family members and/or friends. Can you use those checks towards your down payment?

The good news here is: Yes, you can use those funds— but, and this is an inconvenient but for sure, you’ve got to follow a few rules.

First, let’s back up to go over a few technicalities. When you’re buying a home you get the lovely privilege of turning over your bank statements to your lender. No, they don’t care that you spend $150 on Postmates twice a week, but they do care about whether or not you can afford your mortgage.

This means that they’ll want to see your last 60 days of bank statements. They’ll match your income with what you verbally verified and they’ll look for any large deposits or withdrawals.

Here’s where it might get hairy— let’s say you wracked up on checks for your wedding. Everyone from Aunt Becky to your next door neighbor broke out their checkbook in your honor. Should you request a gift letter for each check? It depends.

Your lender will comb your statements looking for things out of the ordinary. Typically either one large deposit or multiple deposits equalling more than 25% of your take home pay may be questioned. So if you’ve deposited a bunch of small checks— $25 here, $50 there, and so on—you’ll likely be in the clear. On the other hand, if one of your wedding guests was feeling extra charitable and wrote you a rather large check, go ahead and take the necessary steps to make your lender happy.

Want to avoid the whole gift letter exercise? Long before you start the home search go ahead and put your gift money in the bank. As I’ve stated before, lenders will want your last two months of bank statements. Anything that’s been sitting in your account prior to that period is considered “seasoned” and won’t need to be sourced.

A caveat

Make sure the generous gifter is aware of tax implications as it relates to gifts of money. Current tax rules state that an individual can give up to $13,999 per year without paying a tax penalty. Since the tax implication is per person, technically both mom and dad could give you a gift of that amount.

 

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