If you’re embarking on a home search and are lucky enough to have financial help, a gift letter will be an important part of the documentation you have to provide when it’s time to get approved for your home loan. But before you get to the gift letter, it’s important to learn about the do’s and don’ts of the gift itself.
Why Use Gifted Money?
If you want to buy a home, but haven’t saved up a sizeable down payment, it means you’ll have to look for a loan that offers a low down payment option, or buy a less expensive home – either by purchasing a smaller home in the location you desire, or looking in more affordable areas.
So if a qualified donor offers to gift you money toward your home purchase, it could help you buy something a little more expensive, or help you bring your loan-to-value ratio down to 80%. This means you’d get a more favorable interest rate and avoid private mortgage insurance (thereby lowering your monthly mortgage payment).
Down Payment Gift Requirements
There are several rules to keep in mind if you intend to use a donor gift:
In most cases, the person providing the gift must be a spouse, parent, child, dependent, domestic partner, or someone related by blood, marriage, adoption, or legal guardianship.
With USDA loans, FHA loans, or VA loans, a borrower’s employer, union, or even close friend can be an acceptable donor.
The important thing to remember is that regardless of who offers you money toward the home purchase, it must be a gift – not a loan with the expectation that you will pay them back one day. This is why your relationship to the donor is so important to the lender. There must be a clear understanding that the money will never be paid back to the gift donor.
Loan Type/Gift Use
Gifted down payments can be used with several different types of mortgages—such as conventional loans, FHA loans, and jumbo loans—but rules can vary, so it’s important to work with your lender to find the right loan for your situation.
In addition, if you qualify for a USDA loan or VA loan, which offer 100% financing, you can use gift money toward closing costs or to make up the difference if the home is appraised for less than what you offered to pay for it.
Gifted down payments are typically only for owner-occupied primary residences or vacation homes. In other words, if you want to buy an investment property, the gift money would not be allowed.
Minimum Borrower Contribution
In some cases of a gifted down payment, your lender may also require you to provide your own funding toward the home. For example, if your intention is to provide a 10% down payment, including the donor gift, your lender might ask that 5% of it come from your account. This shows you have a vested interest in the home purchase (an indication to the lender of your likelihood to repay the loan).
Gift Letter Requirements
Once you’ve determined your gift is acceptable, you will need a Gift Letter from your donor. It should include:
- The amount of the gift
- The date the funds were transferred to your account
- The donor’s contact information
- The donor’s relationship to the borrower
- A statement from the donor that there is no expectation of repayment
Once the Gift Is Given
Your lender will ask for documentation of the funds transfer, such as a copy of the donor’s check and deposit slip from your own checking account. Again, this is to prove the source of the money isn’t another lender (i.e., you taking on more debt).
If you are in the market for a home and intend to use a gift as all or part of your down payment, your credit union can help guide you through the process and determine which mortgage option will work best. Contact a mortgage loan consultant to learn more.