Making a Down Payment? Use Gift Funds!

One of the biggest challenges buyers face when purchasing a new home is the down payment. Unless you qualify for a loan program with a no down payment option, you’ll need to put a percentage of the purchase price down to close on your new home. And that can be daunting to some borrowers.

The thought of a large down payment shouldn’t deter you from buying your dream home. In many cases, family members or close friends might help you make the down payment. They’ll donate a sum of money you can use at the closing table, most commonly referred to as gift funds.

Better yet, there is no limit to how much someone can gift you – although you may be required to provide a certain percentage of the down payment yourself. And even if your loan program does not require a down payment, you can still use gift funds toward your closing costs!

What are Gift Funds?

Gift funds, or gift money, are contributions from close friends and family members to help finance your new home.

To use the funds for your down payment, you must present a letter from the donor that states the money is a gift, not a loan. If the funds are being transferred into your bank account, you’ll also need to provide a paper trail, such as copies of checks or bank statements, showing the money left the donor’s account and was transferred to yours. If you’re waiting to use your gift funds at closing, you can present a cashier’s check from the donor during those proceedings, along with the documentation behind it.

Loan Program Guidelines

Acceptable donors and documentation vary according to the loan program, but several rules are the same regardless of the program:

• The donor cannot have a financial interest in the home transaction (the real estate agent, etc.).

• The donor will need to provide a signed gift letter including the dollar amount given, date of transfer, statement that no repayment is expected, relationship to the borrower, and contact information.

• The lender will also need proof that the donor has the money outright and did not obtain your gift funds by taking out a loan themselves (like a credit card cash advance). You and the donor will both need to provide bank statements, cancelled checks, deposit slips—anything that demonstrates the transfer of that money.

• Do not use cash for gift funds if possible, and if you do, allow at least 60 days for it to “season” in your account. Cash must be sourced from your donor and raises red flags that can delay your loan.

Ask us for what you need to provide according to your loan program’s guidelines. Now, here’s who can give you that money!

Conventional and FHA

The Federal National Mortgage Association (FNMA), or Fannie Mae, says relatives, spouses, children, dependents, and anyone else related to the borrower through blood, marriage, adoption, or guardianship are all eligible gift fund donors. Borrowers can even use gift funds from their fiancé, future in-laws, or domestic partner.

On the other hand, Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac, loans indicate gift funds can only come from a relative.

For Federal Housing Administration (FHA) loans, gift funds can come from friends and only close family members (no cousins, for example), an employer or labor union, charitable organization, or government agency or public entity.

VA and USDA

Even though you don’t need a down payment for United States Department of Veterans Affairs (VA) and the United States Department of Agriculture (USDA) loans, you may still have closing costs—and gift funds work for those! VA loans allow gift funds from anyone you have a close relationship with, so long as they aren’t an interested party in the home transaction. USDA loans allow gift funds from relatives, the employer, labor unions, charitable organizations, or government agencies/public entities.

Making The Down Payment

Remember that gift funds aren’t the only unique method for funding the down payment. There are down payment assistance programs and retirement assets, just to name a few! Keep reading around the Knowledge Center to learn more about your down payment funding options!