Gift Funds for a Down Payment: What to Expect
By james on June 18, 2010
Most home buyers bring some kind of down payment to the table in a real estate purchase.
The money down can come from any variety of sources, and a very common source of funds is that of the "family gift".
Different loan programs have different requirements when using gift funds as the down payment. Most lenders will require there to be a legitimate and verifiable family relationship between the donor and recipient. The FHA mortgage allows for the ENTIRE balance of cash due to be from a family gift, whereas conforming agency loan programs will require the borrower to have 5% of his own funds in the deal if the down payment is less than 20% (if the down payment is 20% or greater, conforming loans will allow the full balance of the down payment to be from a gift).
So here comes the tricky part - HOW TO DOCUMENT THE TRANSFER OF GIFT FUNDS
A meticulous paper trail showing where the funds start, and how they transfer to the recipient is always required when using a gift as your downpayment. We recently had a significant transfer of gift funds be in the form of cash, which is a BIG NO-NO! Cash is like kryptonite for mortgage underwriters. It is impossible to definitively assign to people, and underwriters will NEVER accept cash deposits of any kind as required funds for a loan approval. I can't stress this enough! The only way to use cash is to deposit into your account as soon as possible, and let it "season" for enough time to show up on a bank statement unconnected from that initial deposit.
Generally what is required in documenting gift funds is as follows:
- Proof of Donor's ability to give the money (proof that the donor is not borrowing the gift from somewhere else) This is usually an asset statement of some kind.
- Transfer documentation: Copy of a canceled check + deposit slip, wire transfer paperwork, or cashiers check copy are usually admissible for underwriting.
- Proof of recipient's receipt of funds
- Signed mortgage "gift letter" DOWNLOAD GIFT LETTER HERE
For more details about how to manage this process, please contact me. My staff and I have a LOT of experience in assisting buyers get great financing packages while using gift funds for a down payment.