Is a new home on your wish list this holiday season? If you’re planning on purchasing a house soon, you might be worried about coming up with enough money for your downpayment. You might be surprised to learn that 25% of first-time homebuyers used cash they received as a gift toward their downpayment, according to the National Association of Realtors. This holiday season consider asking for the gift of a downpayment.
But don’t go asking the big man himself for the downpayment gift funds-it’s likely that your lender won’t accept them. Before anyone forks over any cash, you’ll want to be aware of the rules and regulations for using gift money as a downpayment.
First of all, who can gift you funds?
For VA and USDA loans, which have zero downpayment options, the guidelines are more lenient. Generally speaking, the money can come from anyone that does not have an interest in the sale of the property, i.e. the seller, builder, real estate agent, etc.
FHA and Conventional loans have stricter guidelines, allowing for only immediate family members to contribute funds toward the downpayment, such as a parent, stepparent, child, stepchild, adopted child, grandparent, sibling or stepsibling, or in-laws.
Have a wedding coming up soon? You may also receive wedding gift funds from unrelated persons, so long as you have proper documentation.
FHA guidelines also allow you to receive downpayment assistance through programs setup by:
- employers or labor unions
- government agency
- charitable organization
- public entity that assists low-income/first-time homebuyers
What are the guidelines and what documentation is needed?
FHA loans allow gift funds for primary residences only, while Conventional guidelines allow for primary residence and second homes- but no investment properties.
If you plan to use gift funds as your source of downpayment, you need to make sure you go about the process in the correct manner.
Your lender will need to verify that the money is a gift, instead of a personal loan that needs to be paid back.
No matter the loan type, the donor needs to write a gift letter stating:
- Their name, address, telephone number
- Their relationship to the borrower
- The dollar amount of the gift
- A statement that no repayment is required
You will also need to properly document the gift funds.
Your lender needs to see a paper trail of the money and will require you to provide evidence of the transfer of funds from the donor’s account into your account. The documentation needed will differentiate depending on your loan program and your lender. Cash on hand is never an acceptable source of donor funds.
Because guidelines vary between different loan programs and are dependent on your personal situation, it’s always best to speak with a loan officer to ensure that your gift money will be accepted as a source of downpayment.
The information contained herein (including but not limited to any description of lending programs and products, eligibility criteria, interest rates, fees and all other loan terms) is subject to change without notice. This is not a commitment to lend
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