December isn’t just about festivities—it’s also the perfect time to unwrap the possibilities of a new home. But after finding your dream home, you might realize that you’re short on cash for mortgage expenses like the down payment and closing costs.
Fortunately, you don’t have to put your homeownership plans on pause due to lack of cash. Gift funds are a unique and thoughtful gift that can make this dream a reality.
What are gift funds?
Gift funds can make buying a home more attainable, and they’re essentially a “helping hand” from your family or another approved donor. Simply put, it’s money they give you to help cover the upfront costs of homeownership, such as the down payment and closing costs.
There’s always the risk of home prices and mortgage rates increasing in the future. With gift funds, you can enter the real estate market now and seize opportunities that might be more expensive later on.
The good news is that many home loans—such as FHA, conventional and VA—allow the use of gift funds. There’s typically no limit on the amount of the gift, and you can typically use funds for all or part of your down payment and closing costs (depending on the property type).
If you’re buying a primary residence, your entire down payment can come from a gift. But if you’re buying a second home, you might have to pay part of the down payment from your own funds.
Gift funds aren’t generally allowed on investment properties.
Who are acceptable gift fund donors?
Gift funds are permitted when they come from an acceptable donor.
These donors include:
• a borrower’s relative (spouse, parent, child, sibling, grandparent or any other family member related by blood, marriage or adoption)
• some mortgage programs allow gifts from employers
• a borrower’s close friend may also be an acceptable donor (only with FHA, VA, USDA)
• qualified non-profit organizations
Unacceptable gift fund donors, on the other hand, include individuals with a financial interest in the transaction. These can include home sellers, real estate agents and builders.
Gift fund requirements
Before using gift funds to purchase a house, borrowers and donors need to meet specific requirements and comply with the lender’s guidelines.
• The potential gift donor must fall within the loan program’s acceptable donor category (family members, close friends, etc.).
• Notify the lender early in the mortgage process about the use of gift funds.
• Prepare a gift letter signed by both the borrower and the donor. Your loan officer can help you draft this letter.
When writing the gift letter, you must include a statement confirming that funds are a gift, and not a loan. Therefore, there’s no expectation of repayment.
Mention the amount of the gift, the donor’s contact information, the borrower’s relationship to the donor and the property address.
In addition, you’ll need to include documentation verifying the donor’s financial ability to provide the gift. This can include bank statements or other financial records showing the source of the funds.
Gift funds can ease the path to homeownership by providing financial support for the down payment and closing costs. Acceptable donors like family members, close friends and even employers can make the dream of owning more attainable. But it’s important to follow the requirements set by lenders and your loan program.
If you’re considering using gift funds to purchase a home, check with your loan officer first. He/she can help the funds work to your best benefit. To learn more about gift funds and mortgage loans available to you, contact the loan experts at FirstBank Mortgage.