Everything You Need to Know About Gift Funds

Despite being able to afford the monthly mortgage payments, occasionally potential buyers avoid a home purchase because they lack the funds for a down payment. Many home buyers struggle scrapping up money for a down payment – which is why oftentimes a charitable family member or close friend offer up their help in the form of a gift fund.

Who can donate a gift fund?

A gift from an eligible source can give you that extra push into your dream home, and that’s why it isn’t uncommon for home buyers to receive gift funds. There are a few rules and guidelines that apply to gift funds – specifically who is allowed to give them. Depending on the type of mortgage you choose, the most common sources include:

• Relatives
• Close friends
• Employers
• Charitable organizations
• Government agencies
• Public entities that assist low-income/ first-time home buyers

The gift donor cannot be a person with an interest in the sale of the property including:

• the seller
• real estate agent
• broker
• builder
• any other associated person

What is a gift letter?

So, you have a gift fund donor, that’s great! However, gift funds must be documented so your lender can confirm the source of the money – this is in order to ensure that this money is a true gift and not a loan in disguise which can affect your DTI (debt-to-income ratio).

Your donor must send your lender a mortgage gift lender accompanied by a “paper trail” to back it up.

• The dollar amount of the gift
• The date the funds were transferred
• A statement that no repayment is expected
• The donor’s name, address, phone number, and relationship to the borrower

The accompanying paper trail should include a copy of the donor’s withdrawal and borrower’s deposit slips – or something similar.

How much can be donated?

The amount of money you’re allowed to receive as a gift depends on the type of mortgage you’re borrowing. Some mortgage programs limit the amount that can be used towards a down payment, closing costs, and other fees. Gift funds can only be used on primary homes and second homes, not investment properties.

• Conventional Loans – all of your down payment may be gifted if you’re putting down 20% or more. If you’re putting down less than that, part of the money can be a gift but 5% must come out of your own pocket.
• FHA or VA Loans – entire down payment can be gifted unless your credit score is below the minimum of 620.

More options for down payment assistance?

If you are unable to receive a gift fund – that’s okay, there are other forms of down payment assistance that are available to home buyers. Talk to an expert today to see if you qualify for down payment assistance.