Understanding Down Payment Gift Funds

Show me the money! This line made famous in the movie, “Jerry Maguire,” could very well be used in real estate just as effectively. Crucial in every successful real estate transaction are the funds to purchase a home. Funds can be saved, borrowed from a lender or gifted from a loved one. While saved and borrowed funds are pretty straight forward, gifted funds can be complicated, and if not accounted for correctly, could kill the deal. Next time your buyer states someone is gifting their down payment, here are some follow up questions you may want to ask.

Who is providing the gift funds?

While anyone can give the gift of cash for a birthday, gift funds for mortgages have specific rules on who it can come from. Most loans allow gift funds to come from immediate family members such as parents, siblings, spouses and domestic partners or close extended family such as grandparents, aunts and uncles. The gift funds must be given with the expectation that they are a gift and will not be paid back.

How much is being given?

The amount of the gift funds that can be used or received by the borrower will vary based on loan type and sometimes the borrower’s credit score.  For example, for conventional loans with more than 20% down, all of the down payment can be gifted. If it’s less than 20%, then a portion of the down payment must come from the borrower’s own funds. With FHA loans, all of the down payment can be gifted unless the borrower’s credit score is below 620. If the credit score is below 620, 3.5% of the down payment must come from the borrower’s own funds, and the gift funds received can be used toward additional down payment or closing costs. As a side note for the gift fund donor - Tax laws restrict how much money can be gifted to a family member per year tax free. Ensure the borrower checks with an accountant to see what current law allows.

Can you document the gift?

When giving gift funds for a mortgage, the lender is going to require a gift letter. This letter typically includes donor name, relationship to the borrower, date, amount of the gift given and proof it was received. The lender may also require bank statements from the donor depending on the loan type in order to ensure the donor has the ability to give the gift.

If the donor does not want to provide bank statements, are there other options?

Understandably, some family members are uncomfortable sharing their financial information with other family members. Conventional loans allow the donor to wire the gift funds at closing and thus negate the need for bank statements. Another alternative is to receive the gift funds from the donor as early as possible in the home search process. When a borrower begins the loan process, they must provide the previous two months bank statements. Any funds that are already in the account at that time are considered “seasoned” and would not require additional documentation.

Since gift fund rules vary depending on loan type, it’s best to consult a mortgage professional to assist your buyer with the specific guidelines and documentation required to ensure a smooth loan process and closing. When it comes to gift funds, remember to ask the buyer to show you the money!