Are you considering getting some financial help from your family or friends towards the purchase of a home? With the increasing prices of homes, using gift funds for a down payment has become a practical choice, especially for first-time homebuyers. This guide aims to help you understand the process of using gift funds to purchase a home by addressing your key questions and guiding you through the requirements. Whether you’re a first-time homebuyer or planning to buy an investment property, understanding the nuances of gifting funds can make a significant difference in your home-buying journey.
What Are Gift Funds?
Gift funds are sums of money given by family members or approved donors to assist with the purchase of a home. These funds are primarily used to cover significant expenses such as down payments and closing costs, which can often be substantial barriers to homeownership. Unlike loans, gift funds come with the advantage of no repayment obligation, making them an attractive option for many buyers, especially those stepping into the market for the first time.
Gift Funds in Home Buying: Eligibility for Different Property Types
When planning to buy a home with gift funds, it’s essential to understand how their use varies based on the type of property you’re aiming to purchase. Below is a straightforward guide to help you navigate these options:
- Primary Residence: For primary residences, most loan types, including Fannie Mae, FHA, VA, and USDA loans, are quite accommodating. Generally, there is no limit on the amount that can be gifted, making it easier for buyers to manage the financial aspects of purchasing their main home.
- Second Homes: When it comes to second homes, such as vacation properties or additional residences, Fannie Mae loans provide the flexibility to use gift funds. However, it’s important to note that the borrower typically needs to contribute at least 5% of the down payment from their own funds. This requirement ensures a level of personal investment in the property.
- Investment Properties: However, the scenario changes for investment properties. Notably, Fannie Mae loans restrict the use of gift funds for properties intended for rental or resale. As a result, prospective investors need to consider alternative financing routes for these types of real estate ventures.
Who Can Gift Money for a Mortgage Down Payment?
Understanding who can legally provide gift funds for a mortgage down payment is crucial to ensure compliance with lender requirements. Not all sources are deemed acceptable, and the rules can vary depending on the loan type. Here’s a breakdown of acceptable donors and important considerations:
Acceptable Donors
- Relatives: This includes spouses, children, dependents, and anyone related by blood, marriage, adoption, or legal guardianship.
- Extended Family-Like Relationships: Non-relatives such as domestic partners, fiancés, former relatives, or godparents are also acceptable donors.
Key Restrictions
- Prohibited Donors: Individuals involved in the home purchase process, like builders, developers, real estate agents, or any other related parties, cannot provide gift funds.
- Seller Exception: If the seller is an acceptable donor (like a family member) and not involved in other aspects of the transaction, they can provide gift funds. This also applies to gifts of equity.
Acceptable and Prohibited Donors at a Glance
- Commonly Accepted: Parents, grandparents, uncles, aunts, siblings, spouses, fiancés, in-laws, close friends, employers, certain charities, and public entities aiding low-income or first-time buyers.
- Not Accepted: Anyone with a financial stake in the sale, such as the seller, homebuilder, developer, loan officer, or real estate agent. Funds from these sources are seen as price reductions, not gifts.
Writing a Gift Letter for Your Mortgage
When using gift funds for a mortgage, a crucial step is to provide a gift letter. This document is essential for your lender to verify that the funds are a genuine gift, not a loan, which could impact your debt-to-income ratio (DTI). Here’s how to create an effective gift letter, along with a template for your convenience.
What is a Gift Letter?
A gift letter is a formal document that clarifies the nature of the funds you’re receiving. It confirms:
- The funds are indeed a gift, with no expectation of repayment.
- The specific amount of the gift.
- The date the funds were transferred.
- The donor’s details (name, address, phone number) and their relationship to you.
Steps to Document Gift Funds
Sign the Gift Letter: You’ll receive a template letter stating there’s no expectation of repayment. Fill in the details about the gift amount, property address, your relationship with the donor, and both parties must sign and date it.
Provide a Paper Trail: Maintain a detailed record of the gift transaction. The donor can transfer the funds directly to you (via check or wire, not cash) or to the title company. If the donor liquidates assets (like a CD or stock), they must document this process. Keep all relevant statements and documentation.
Document Receipt of Funds: Once you deposit the funds, or they are wired to you, provide an updated bank statement showing the funds as available. When depositing, get a receipt matching the exact amount of the gift funds. Avoid depositing any other money simultaneously. If there are multiple gifts, handle each separately.
Gift Letter Sample
I/We [Donor Name(s)] hereby certify the following:
I/We have made a gift of $[Amount] to [Borrower Name(s)], and no repayment is expected or implied in the form of cash or future services.
This gift is for the purchase of the property located at [Property Address].
The source of these funds is:
[Bank Name, Account Type, Account No.].
Relationship to Borrower: [Relationship]
Donor's Name: [Name]
Address: [Address]
Telephone: [Phone Number]
* Donor Signature: [Signature] Date: [Date]
* Borrower Signature (Recipient): [Signature] Date: [Date]
Note: By signing this gift letter, I/We certify that the funds provided to the homebuyer were not sourced from any person or entity with an interest in the sale of the property, including the seller, real estate agent, broker, builder, loan officer, or any entity associated with this transaction.
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More options for down payment assistance?
Understanding the ins and outs of using gift funds for home purchases can open doors to homeownership that might otherwise remain closed. Whether it’s an FHA loan or a conventional mortgage, knowing how to properly use and document gift funds is essential. If you are unable to receive a gift fund – that’s okay, there are other forms of down payment assistance that are available to home buyers. Talk to an expert today to see if you qualify for down payment assistance.
