How Do You Use A Gift When Buying A House?

Certified Mortgage Advisor
NMLS 1701021
Published 
March 5, 2022

How gifts work for a down payment and closing costs

So for a lot of people saving for a down payment and closing costs, it's really difficult. Like as homes continue to increase in cost, so does the down payment as well.

Gift, not a loan

So there are a good amount of people who then rely on their family sometimes, outside of the family to help them with a down payment and closing costs with a gift. And what the way a gift works is someone gives money to somebody purchasing a home without an expectation that is going to be repaid. So it's a gift, not a loan.

What are the requirements?

What I want to do is I want to help you see all the requirements here because gifts can be actually really frustrating in the mortgage process. There's gonna be a lot going on when you look to buy a house. And if you're looking at using a gift, people just start moving money around and it creates so much frustration for people. And so I wanna guide you through the best way to do this, that way you have as little frustration as possible when you are choosing to use a gift. So this is a high-level overview of how this works.

Gift letter

So we first have a gift letter. What a gift letter does is basically say somebody is willing to give you money to buy a home for the down payment closing cost you know, either or. And they don't expect to be repaid. This is something that the lender is going to give to you.

Transfer of money

From there, what then ends up happening is there's gonna be a transfer of money from the donor to the person buying the home, or there are several different ways. This can actually happen and this is where it gets messed up. You need to do this the right way. People often just wanna start moving money around and it creates so much stress because there's a lot more documentation that can be required. And it just adds an extra kind of hurdle to the process that you don't really wanna have to deal with. So I'm gonna show you the right way to do this.

So we go from a gift, transfer of funds happens, and then that is money that you can use as a down payment or closing costs that you aren't paying back.

What is in a gift letter?

So gift letter is usually just a one-page document that you're going to get from your loan officer. So you don't have to make this on your own. You're going to get this from your loan officer. This is what it needs to have on it. It's gonna have the name of the donor. So who's giving you the money, their address, their phone number, their relationship to you? And I'll show you who is eligible as a donor and who is not also the gift amount that they're giving you most of the time, the gift amount. Tends to be whatever the minimum down payment is.

So for conventional loans, 3% for first-time, home buyers. For FHA loans, it's 3.5%, for VA and USD don't require a down payment, but sometimes closing costs are gifted in there as well. So usually I see it around the minimum down payment, however, you really can gift with most loan programs, any amount that you'd like. It also has to say that there is no expectation of repayment, and then most of the time you need to also show the date of the transfer of that money as well.

Conventional - Fannie Mae

So let's first talk about conventional loans. I'm gonna walk you through conventional, FHA, VA, and USDA all those different loan types and their requirements so you don't run into any frustrations when you do get a gift with these loans.

Eligible donors

So, first of all, who is an eligible donor, who can actually give you money? This can trip up a lot of people because it's not anyone, right? It can't just be a friend. It can't just be somebody who said, Hey, I'll give you some money that, that doesn't really work. Also if you have any more of those friends, let me know. I'd love to talk with them. So eligible donors, you can, can be a borrower, spouse, child, another independent, or any individual who is related to the borrower by blood marriage, adoption or legal guardianship, fiancé, or domestic partner.

Who can't give you

It cannot be or have any affiliation with an interested party in the transaction. Basically what that means is it can't be the seller. It can't be the real estate agent. They cannot give you a gift to buy your home.

Primary or secondary residence, not an investment

Also, this does have to be on a primary residence or secondary residence, so you cannot get a gift on an investment property.

5% down for 204 units

If you're buying a home that is two to four units, that's a primary residence. You need at least 5% down of your own. Then you can get a gift on top of that or if it's a secondary home you that's less than 20% down. If it's a secondary home, that's less than 20% down you also need to put 5% of your own money down.

For documentation

There are four different kinds of documentation. So it can be one of the following either be a copy of the donor's check and borrower's deposit slip, a copy of the donor's withdrawal slip and borrower deposit slip copy of the donors to the closing agent, or a settlement statement showing receipt of the donor's check. So there's a lot of documentation, but the best option with the least amount of friction is a settlement statement showing receipt of the donor's check.

What we don't want to do

When you're getting a loan, you want to give the underwriter the minimum amount of documents possible. Because of the documents that they see, they get to ask questions about. And we just don't want extra questions and sending in extra documents that can require additional documents on top of it. We don't want that. We want to send in the minimum amount possible, and this is the best solution.

Gifts needs to be documented

So what happens a lot of times is people make the mistake of they have the donor, send them a check. They're like, oh yeah, I already sent them a check and I deposited it. Well, now that has to be documented as one of these options.

Gift sent directly to the settlement agent

The easiest solution is to have whoever's giving you money, have them send it directly to the settlement agent. So you know, around here, that's our title agent. So send it directly to the title agency and they can provide a receipt that that money was received. And then you don't need anything from your statement side, they don't need anything from the donor's statement. It just makes it a lot easier than having you send in bank statements multiple times to show the money you had.

Now the new gift and it's getting a little complex and people start getting frustrated. And so just have the donor send it directly to the title company. It's gonna work out the same way, whether it hit your bank or it's just applied as a credit towards your cash to close. So you still get the gift both ways.

Gift of equity

A gift of equity is allowed and that is where someone would, instead of giving you like a check for money or sending that to a title company, they're gifting you a portion of the equity they already have in the home. And basically transferring that over to you.

Conventional - Freddie Mac

For Freddie Mac, the same thing, it's a conventional loan. It's just a different brand of conventional loan that might be a good way to think about it. You have Fannie Mae or Freddie Mac, talk to your loan officer about which one you're using. It's gonna be the same thing as Fannie Mae.

Wedding gifts are allowed

The only really interesting difference here is that it does allow wedding gifts. Fannie Mae and all the other loans don't talk about wedding gifts, except Fred Mac actually mentions it in their guidelines and they don't limit who the eligible donors are right on the other. I talked about who could be an eligible donor, but with Freddie Mac, if it's a wedding gift, it can be anybody.

Requirement for wedding gift

So what it requires is a copy of a marriage license and verification of the gift fund deposit within 60 days of the date of marriage. If it's beyond 60 days at that point, those funds have seasoned in which I've talked about my down payments of video you don't, it's not gonna be treated as a gift anymore. That's just gonna be your own funds. But if it's within that, within that 60 days, it's a gift and you need those two things.

FHA eligible donors

FHA is a lot more strict on the gift requirement side, so they can say to a family member I'll just run through this list really quickly. Child foster child, parent grandparent spouse, or domestic partner, adopted son or daughter, brother, sister stepbrother, stepsister, uncle, aunt son, daughter, father, mother, brother, or sister-in-law. Employer or labor union, a close friend with a clearly defined interest in the borrower.

Defined interest in the borrower

This one is really tricky. I've only heard stories of people being able to make this work. I've never actually seen it in person. The only time I've seen this work tends to be when it's a couple who is engaged. The defined interest is the fact that they got engaged. I've heard stories of people saying, yeah, a friend gave money and they printed out their Facebook news feed of how much they poked each other and whatever you do on Facebook. I don't know if that really flies anymore. This is one of those kinds of great areas for underwriters that they usually aren't okay with just signing off on because it's so vague.

Charitable organization or government entity

Then another one is a charitable organization or government entity. This would be like if you're getting down payment assistance would be through something like that.

FHA Primary residents only

FHA loans are for primary residents. Residents are only anyway.

Cash on hand is not allowed

A donor cannot take cash and just hand it to you. That's not an acceptable source.

Documentation

The first is if it's already in your account, if they gave you money and it's in your account already, you need the donor's bank statement, showing withdrawal and evidence of deposit into your account. This is the big thing with the FHA that trips up a lot of people is that if you're getting a gift from someone. You should expect that the underwriter is going to ask for 30-days worth of bank statements from the donor.

It's really frustrating. I'll explain a little bit more of that in detail. The number of times I've had people yell at me because of this is too many to count, but that's just the rule. I, unfortunately, can't change it. That's FHAs rule. They want to see the donor's bank statement as well. So just that's a heads up. If you're using an FHA loan and getting a gift, you need to have that conversation with the person giving you the money. Hey, this is what's required on the loan. These are the guidelines, and then they can make that decision if they're comfortable giving you the money after that. But that's a conversation you need to have with your donor.

If it's not in your account

They need a certified check money order, cashier's check, or a transfer showing the withdrawal.

Paid directly to settlement agent

Then also we can do the solution that I like the best, which is to pay directly to the settlement agent. And then the loan officer can actually reach out to the settlement agent and get a receipt showing that they actually have that. Even if it's paid directly to the settlement agent, you still should expect that the underwriter will request the donor's bank statements.

Gift of equity

A gift of equity is allowed, but the only eligible donor is a family. So FHA does have this small little blurb in their guidelines. It says, regardless of when the gift funds are made available to a borrower, the lender must make a reasonable determination that the gift funds were not provided by an unacceptable source like a real estate agent or someone like that.

It says this usually requires a copy of the donor's bank statement. So just know that when you go into an FHA loan, looking at a gift, you likely are going to need a bank statement from the donor. Keep in mind too that if you're getting a gift from your parent, they don't have to send you their bank statement and then you send it to your loan officer. They can send it directly to the loan officer. Like I've done that plenty of times. So nobody sees each other's bank statements. Nobody sees what's going on, but the underwriter has to verify that it didn't come from the seller or the realtor or whatever.

USDA loans eligible donors

This is a little bit different from USDA and VA because they don't have this long list of has-to-be family members. It's really anyone that doesn't have an interest in the sale of the property, the seller, the builder's real estate agent. So as long as it's not those people, it can be a friend. It can be any random person who decides to give you money. It doesn't require the donor to have familial ties to the borrower.

Gifts cannot be used as reserves

It's just a little side note in there on other loans, you can use a gift as a reserve. Sometimes loans like FHA might say you need three months of reserves. That's the money left over in your bank account after you pay for your down payment closing costs. But on USDA, it cannot be reserved. Cash on hand is also not acceptable there.

VA eligible donors

Same thing as USDA anyone that doesn't have an interest in the sale of the property. And then for documentation, it's a lot more lax. It is just evidence of the borrowers' deposit. Or a copy of the donor's funds by check electronic transfer, to the closing agent or the CD showing receipt of donor funds. And so the way that both USDA and VA work is going to be very similar in that it's going to be the best to just transfer it directly to the agent.

Gift of equity is not in the guidelines

But it's likely similar to USDA. So with USDA the way that gift of equity works is that since USDA and VA, VA is both 0% down normally you're not really needing a down payment. And so it doesn't really make sense to have a gift of equity. Instead, it's a reduction in the purchase price.

Rare trick

One rare trick that probably is gonna be used is not going to be used by a lot of people. I've only run into this a couple of times, but if you have somebody who is willing to give you a 100% gift. This is a very rare situation, so I call it a rare trick. I've run into a situation where a parent wanted to give a son to buy the home, but then the son was going to pay the money back and get a mortgage for it. So the son got the advantage of having a cash offer, but being able to take long-term financing.

Now, normally people do this when people have the cash, they can do this on their own using a method called delayed financing. But when someone else does it for you, this is the trick to make it work if you're in this very rare and unique situation.

The way that this happens is somebody can give you someone can pay cash for the home. It can be in your name, but then what they need to do is actually write a small little note, like they can look up notes, template online. They need to give you that has a payback period and interest rate and all that, and then ends up happening is you can actually do a rate in term refinance to pay them back. And then you now have a long-term loan, but you were able to do a cash offer upfront. So very rare trick. Not a lot of people are in that, that situation, but I don't think a lot of people know that solution does exist if you are in there.

Best plan

Boiling all this down, look into the unique loan that you're using and the requirements. The first thing is a gift letter is gonna be written and then don't move money around. Please don't move money around. It just makes it so much more complicated and then you get kind of defined into what you're able to do.

So the gift letter's gonna be written. You're gonna get this from your lender, ask your lender for the gift letter. You're gonna fill that out, fill it out with your donor. And then have the donor directly transfer the money to the settlement agent. Talk to your lender about who exactly I need to send that money to or who they are, and who the donor needs to send that money to. If you're using an FHA loan expect that they will request the donor's bank statements. Even if you do that, this is the easiest solution.

Talk with a loan officer
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