Are you planning on using gifted funds to cover the cost of your mortgage downpayment? If so, there are a few things that you need to keep in mind.
If you are going to be using gifted money to pay off the downpayment requirement for your loan, you need to follow certain guidelines and rules when applying for a mortgage.
Here is an overview of the rules for accepting “gifts” of money to go toward your mortgage downpayment.
Who Can Gift You Funds for a Mortgage Downpayment?
Mortgage lenders maintain certain restrictions for qualifying who you can receive monetary funds from that will go toward your mortgage downpayment.
Typically, you cannot accept money from anyone. The person providing you the funds generally needs to be a close family member, such as a grandparent, parent, or sibling.
If you are married, you can also accept money from your domestic partner, spouse, or in-laws. If you are engaged to be married, but not yet married, you can usually accept funds for the mortgage downpayment from your soon-to-be spouse.
This restriction is in place because it makes it easier to verify and prove the source of the money. There is too much gray area involved with accepting money for a downpayment from people outside of your family, even if it is a close friend.
Another reason why most mortgage lenders will only accept funds gifted by a legal family member is that it helps to verify the family’s ability to afford the mortgage over time. When a family member gives you the money, it speaks to the borrower’s overall financial situation. However, if the money came from an external source, it does not secure the borrower’s ability to pay off the mortgage over time.
How Much Gifted Money Can Be Used to Fund the Mortgage Downpayment?
Is it possible to use 100% gifted money to pay for your down payment? In some cases, yes. In others, no.
It depends on the type of loan you are taking out. Mortgage downpayment gift amounts are generally limited to a certain percentage of the overall downpayment requirement based on loan type.
For example, it’s possible to source the full 20% downpayment from eligible gifted funds for a conventional mortgage loan. However, if you’re taking out a conventional loan and putting down less than 20%, only a portion of that downpayment amount can be sourced from gifted funds.
For a VA loan, you can source the full downpayment funds from gifted money if you meet the credit score requirement of 580. If the borrower’s credit score is below 580 for a VA loan, the borrower is responsible for paying at least 3.5% of the mortgage downpayment themselves, and any additional downpayment funds can be sourced from gifted money.
If you plan on using gifted funds for your downpayment, make sure that you speak to your lender at the beginning of the loan underwriting process to learn about specific guidelines that may apply to your loan type.
How Do You Document the Gifted Funds Going Toward Your Downpayment?
To verify the funds and keep a record of the transaction, mortgage lenders require the submission of documentation regarding the gifted money.
The main document that needs to be submitted to your lender is a letter outlining the terms and details of the gifted funds. The letter needs to include the following information:
- Name of the provider of funds
- The homebuyer’s name
- The address of the property being purchased
- The donor’s relationship with the homebuyer
- The details of the transaction, included the gifted amount and date of the transfer
- The source of the funds, such as a checking, savings, or investment account
- A statement from the donor confirming that the money is a gift and that they do not expect to receive repayment from the homebuyer
This record must be signed by both the donor and the recipient of the funds and dated. To streamline the process, many lenders provide borrowers with a template for the letter that includes all of the information required in the proper format.
Besides this official letter, you will also need to provide your lender with other documentation to verify the source of the funds.
Generally, you will need to provide this additional documentation:
- A copy of the check from the donor to recipient
- A copy of the deposit slip for the funds entering the donor’s account
- A copy of the withdrawal slip for the funds exiting the donor’s account
- A copy of the deposit slip for the funds entering the recipient's account
- A copy of the donor’s funds being submitted to the closing officer via check
- An official statement from the closing officer confirming the reception of the donor’s gifted funds for the mortgage downpayment.
If you have any additional questions about gifted funds going toward the mortgage downpayment, please contact your real estate agent and mortgage broker for specific guidelines and advice.
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