Gift funds are an acceptable form of funds for your down payment and/or closing costs, including earnest money for an FHA loan but there are some requirements that you should be aware of in order to help the process.
First, let me state who is an acceptable source to provide gift funds:
- A family member;
- Employer or labor union;
- A close friend with clearly defined and documented interest in the borrower (you);
There are additional sources such as charitable organizations and a governmental agency or public entity that has a program providing home ownership assistance to low or moderate income families or first-time home buyers, these would need to be discussed with your lender for further details.
There is not a limit as to how much they are allowed to gift/contribute but referring to gift funds it is a “gift”, meaning that there is no expectation of repayment.
Second, is the required documentation:
- Must obtain a gift letter (This letter will be provided to you by your lender to complete) that is signed and dated by the donor and the borrower (you) that includes:
- donor’s full name, address, and telephone number
- the donor’s relationship to the borrower;
- the dollar amount of the gift; and
- a statement that no repayment is required
Third, and the most important part is to document and source the gift funds, which can also be the most difficult and/or complicated part of the process IF the donor is unable and/or unwilling to comply:
- If the gift funds have been verified in the borrower’s account (bank statement), lender needs to obtain the donor’s bank statement* (not transaction summary) showing the withdrawal and evidence of the deposit into the borrower’s account.
- If the gift funds are not verified in the borrower’s account, lender will need to obtain the certified check, money order or cashier’s check or wire transfer or other official check, AND a bank statement* showing the withdrawal from the donor’s account.
*Please Note: Be aware that if there are large deposits that are not payroll in the donor’s bank statement, these may need to be sourced (verified)! You may be asking yourself “why is this necessary”?, the reason behind this is as a lender we have to verify that the funds are coming from an acceptable source, that these funds are not being laundered (Patriot Act), nor are you getting funds from anyone involved in the transaction such as your Realtor or Lender in order for you to purchase the property.
Cash is unacceptable! If you know that you have a family member who has been saving cash for you I highly advise getting those funds deposited into your bank account immediately, they will need to remain in your bank account for a minimum of two months prior to getting pre-approved (submitting statements to your lender) otherwise you will be unable to use those funds towards your purchase!!
I will say that gift funds tend to be the most difficult and tend to have the most complications during the underwriting process with our clients. In order to limit the stress on yourself and your donor we highly suggest getting the funds prior to your pre-approval. If for any reason you are unclear on what amount you may be needing to help in your purchase than I would suggest having a consultation with a lender to get a rough estimate of cost and financial expectations in order to better prepare yourself and your donor so you can receive the funds prior to the pre-approval process and well before going under contract!! You do not want to be dealing with the transferring and depositing of gift funds when you are under contract, this creates lots of tension and stress for all involved. We know you may be anxious to purchase but trust us when we say it is far better take the extra time and prepare yourself by getting all your funds and financials are in place prior to getting pre-approved.
Please call us if you have any questions, it is always to be better informed and better prepared when you are looking to purchase a home. There is no such thing as a “stupid” question.