This Article Is About Gift Funds For Down Payment On House Purchase
HUD, the parent of FHA, allows gift funds for the down payment on house purchase:
- 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
- Conventional mortgage programs allow gift funds
- 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
- It 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 on this article
Mechanics Of Gift Funds For Down Payment
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.
