By Alena KairysDec 19, 2021
When it comes to saving money to buy a home, every bit helps. If you’ve received a handsome check or cash as a present, it makes sense to put it towards your home purchase. However, there are a few rules to know about using gift funds to buy a home; read on to learn how to do so properly.
What are Gift Funds?
Gift funds are money that usually comes from a family member that you use towards a down payment, closing costs, or escrow payments. They can be in the form of cash or a check, and do not require repayment. If the person giving you the money expects it to be paid back, it will be factored into your debt-to-income ratio (DTI). Though it’s perfectly all right to use gifted funds to buy a home, you’ll need to declare them with your lender. Even if the money is now yours, it needs to be vetted by your lender to ensure it was procured legitimately and that the donor is not a conflict of interest. Fortunately, this process is simple to do, and most loan programs accept gift funds, either in part or in whole. Depending on the loan program you use and the property type, you may be limited in how much of your down payment can be financed with gift funds or who is allowed to donate to your homebuying cause. Be sure to work with your loan originator to help you make sense of the program’s gift funds policy.
How to Use Gift Funds
Using gift funds correctly involves submitting a formal acknowledgement of the present and providing receipts. This is an effort to create a paper trail that your lender can reference when underwriting your loan. The person who gave you the money needs to write a gift letter to hand your lender. The letter doesn’t need to be complicated or full of legal jargon; it simply needs to include the following: the amount of money given, dates the funds were withdrawn, the donor’s contact information, relationship to the recipient, and a statement that repayment is not expected. You can even find gift letter templates online. The other component to using gift funds is providing receipts of the funds exchange. These include wire transfer receipts, bank statements, and copies of the donor’s check and recipient’s deposit slip.
Not every dollar that you receive from a family member needs to be documented, however. Generally, if the gift funds are more than a quarter of your income, you should request a gift letter from that person. If you aren’t sure whether you need to include a letter, ask your lender. For deposits that were made over two months before your mortgage application, they are considered seasoned and do not require special documentation. Even so, your lender will still need to examine various financial documents to ascertain your financial situation. You should always be upfront with your loan originator when it comes to your finances and assets.
Having extra cash to finance your new home is a huge advantage when you’re in the homebuying process. Providing verification for gift funds is easy to do and will go a long way in allowing you to fulfill your dreams of homeownership.
If you have any questions about using gift funds, contact one of our licensed Mortgage Loan Originators. If you’re ready to begin the home buying process, click here to get started!
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