Weddings and Home Loans: Using Gift Funds for a Down Payment
Not only is it wedding season, but it’s also home buying season. And you’d be surprised by how often newlyweds upgrade to a home soon as they tie the knot. In fact, many couples ditch the traditional wedding registry for monetary gift funds, specifically to help them purchase their new humble abode.
It’s so common that I considered a “home fund” for my wedding. After all, what’s the point of receiving tangible gifts and having nowhere to put them? My small apartment’s storage space, or lack there of, definitely couldn’t handle all the gifts. So, “funds” have become the more popular gift requests. Although asking for money is still a sensitive request, it’s become more acceptable, especially if you clearly state how you plan to use the money: honeymoon, home, etc.
Although some loan types allow gifts for funding your down payment, it takes a little bit more work and documentation to use monetary wedding gifts to purchase a house — something I didn’t really feel I wanted to spend time on. But for some, it may not be daunting! So if it’s something you and your partner would like to consider, here’s what you need to know about wedding gifts for funding your down payment on a house.
Different loans have different gifting rules
Not all loan types and programs accept weddings gifts as funds the same way. Some are even particular as to how much is accepted and how much is your own, out-of-pocket contribution. For Fannie Mae and Freddie Mac, gift funds are accepted in their entirety on single family residences. The split between what amount can be gifted and what is your own contribution to the down payment depends on the loan type. In some cases, gifts are only accepted if the funds are from your relative. If it’s not your relative then further documentation may be required to show that the donor has a close relationship with you.
The FHA loan has flexible qualifying guidelines and accepts gifts for funds, but it also has certain requirements, one of which is regarding the donor of the wedding gift. For instance the donor can be your relative or close friend if they have a clearly defined and documented interest in you, but it could even be a charitable organization, or your employer. There are additional guidelines as to what percentage of your down payment can be gifted, so be sure you are familiar with your loan’s guidelines beforehand. No matter when you receive your down payment gifts, the lender will make sure to check that your sources of gifts are in fact “gifts” and there’s no expectation of you repaying any person back for that down payment donation. The same goes for other loan types, too.
To show that your gift funds for a down payment are legitimate, documentation is required.
For loans like the VA loan and USDA loan, gifts for funding a down payment may be accepted but both of these loan types don’t require a down payment and are backed by the government. Ideally, if you meet with a mortgage banker you could plan out these sort of things and have a better understanding of how much to save and what to use your monetary wedding gifts for.
Gift letters
In terms of documentation, if someone were to gift you money for a down payment, you’ll have to provide your lender with a gift letter. A gift letter states that the money you were gifted is indeed a gift and not a loan; meaning, you don’t have to pay the donor back. It’s required that you do this for every donor that you received a down payment gift from. Here’s what you’ll need to include in your gift letter:
The amount that is gifted
Your future home’s address or “TBD”
Name, address, and account of depository institution
The date the gift funds were transferred from their account to yours
Name, address, and phone number of the person (donor) who gave you the gift
The donor’s relationship to you
The donor’s signature verifying that this gift is not a loan
Your signature
Different lenders may have different requirements as to what is included in the gift letter. But aside from the gift letter, sometimes you may be asked to provide additional documentation regarding the monetary gift, for example, bank statements showing the money in the gift giver’s account and then your bank statement showing the transfer of that money to your account.
The advice with gifted down payment funds is to keep a long paper trail of the gift just in case.
If you set up a fund at your wedding and let’s say, 50 people provided you with monetary gifts for your down payment, hunting them down for signatures and bank statements might not be the most easiest thing to do, or comfortable. It entirely depends on each person’s situation and relationship to the donors. So, if it’s not too much work for you and your wedding guests, then you’ll likely be more comfortable with the idea than I was.
Gifts aside, you may be eligible for a down payment assistance program or a loan that requires no down payment, which can help make buying a home easier. It’s always good to speak with a mortgage banker first to see what the best next step is for you and your soon-to-be husband or wife.