Important Facts About Gift Funds
You are getting ready to buy a new home and your parents give you some money to help with the downpayment and closing costs. Now what?
There are many rules and regulations for buying a house and applying for a mortgage. For example, your lender must know where the down payment money comes from. If you are receiving help from friends and family, here are a few tips
What are Downpayment Gifts - a downpayment gift is money that a buyer receives from someone else to use toward a down payment or closing costs during a home purchase. Downpayment gifts do not need to be paid back.
Gift Rules and Gift Letters - different loan types have different restrictions on who can give you gift funds, how they can be used, and how they need to be documented. Regardless of loan type, most lenders need a gift letter that documents the details of who is gifting the money, what their relationship is with the buyer, and how much is being given. This letter also states that the money does not need to be repaid and must be signed by the donor. The lender may also require that the donor verify sufficient funds and document where the funds are coming from.
Conventional Loan Gift Rules - conventional loan lenders often allow buyers to use gift money for downpayment, closing costs, or financial reserves. However, sources of gift money are restricted to romantic partners and family members. And, gift funds can not be used to buy investment properties.
FHA Loan Gift Rules - FHA loans allow buyers to use gift money to pay closing costs, mortgage expenses, and down payment. Friends, family, employers, and other entities can gift money. In addition to the gift letter, the donor must provide proof of both withdrawals from the source account and deposit to the buyer’s account.
USDA Loan Gift Rules - USDA loans offer unique benefits to buyers in rural areas by not requiring a downpayment to purchase a home. As such, gift funds aren’t often used toward a downpayment, but they can be used to pay for the loan’s closing costs. This money cannot be used for reserves or to help the buyer make mortgage payments. Gifts can come from family members, employers, labor unions, charitable organizations, or a homebuyer assistance program.
VA Loan Gift Rules - Like USDA loans, VA borrowers don’t need to make a downpayment when using a VA Loan. Buyers can use gift funds to cover their closing costs and pay for the funding fee. Almost any person can gift money to a VA buyer.
If you are thinking about using gift money to buy a home, make sure you speak with your lender about their gift rules before applying for a loan.
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