Real Estate: How Down Payment Gifts Really Work

You can use gifts to buy real estate -- but not always.If coming up with a down payment on your own is a bit of a stretch, you may be able to buy a home using gift funds for the down payment.

Gifts can be perfectly acceptable under the lending guidelines for most types of mortgage financing available today, but it’s super important that they are documented properly or your loan could get turned down.

Acceptable Sources of Gifts

The first requirement of gift funds is that there is no expectation on the part of the donor for the funds to be repaid. Second, gifts need to come from an acceptable source, which can include the following depending on the type of financing you’re selecting:

  • Relative
  • Employer or labor union
  • Close friend
  • Charity
  • Governmental agency or public organization that helps people buy homes
  • Fiancé, fiancée, or domestic partner.

A gift donor cannot be any person or entity who has a financial interest in the purchase transaction, including the seller, real estate agent, broker, lender, building, or anybody associated with them. Work closely with your loan officer to be sure the source of the funds meets underwriting guidelines.

Minimum Contributions from Gifts

If you’re opting for a conforming or super conforming conventional loan, there are some limited circumstances where you may be required to make a minimum contribution towards the down payment. In other words, 100% of the down payment cannot be from the gift funds. This won’t apply to most borrowers, but be sure to check with your loan officer to see if this applies to you.

Writing the Gift Letter

As I mentioned already, it’s super important that you follow the correct procedures for documenting and paper trailing the gift funds. The first step is to write the gift letter, which must include the following information:

  • The dollar amount of the gifts
  • The address of the property being purchased
  • The relationship of the donor to the person purchasing the home
  • A statement affirming that the money is a gift and not a loan
  • Signatures of all parties and the date

Don’t get wordy here! Include just the necessary information and nothing else. Writing  long explanations and back stories can create added headaches that are better avoided.

How the Donor Needs to Document Gifts

If you’re the donor, I highly recommend using a check to gift the funds because it is much easier to document. Remember, the underwriter wants to see a good paper trail, so don’t cut corners here. Keep a copy of the check and make sure the check amount matches the amount on the gift letter (to the penny).

If you’re transferring funds out of another account (such as a stock account, for example) into the account you’re writing the check from, be sure to get statements showing the transfer from that account into your checking account. The underwriter will likely want to see the last ninety days worth of statements for all accounts involved.

How the Borrower Needs to Document Gifts

If you’re the borrower, take the check into your bank (so you can get a receipt) and deposit it into the account from which you’ll draw all funds for your down payment and closing costs. Don’t use multiple accounts or you’ll create some added paperwork headaches for yourself.

Also, don’t deposit anything else with the gift funds. The amount you deposit must match the amount on the gift letter. Be sure to get a receipt that you can forward onto the underwriter to document the deposit. The deposit amount on the receipt must match what’s on the gift letter.

Forward Documentation to the Underwriter for Gifts

Once the gift transaction is complete, be prepared to provide the following documentation to the underwriter:

  1. The signed gift letter.
  2. Last three months worth of complete bank statements (all pages) from the donor documenting the source of funds. Include statements for all accounts involved in the transaction.
  3. A copy of the check.
  4. Last three months worth of bank statements for the borrowers account from which the cash to close (for down payment, closing costs, etc.) will come.
  5. The receipt for the deposit of the funds into the borrower’s account.

Yes, it’s a pain in the neck to gather this all up, but don’t cut corners or the loan could be turned down. Again, the underwriter wants to see a solid paper trail, so be sure to provide them with one so the loan approval process goes smoothly.

Note that guidelines change all the time and the underwriter may be request different or added documentation depending on the circumstances. Be sure to work closely with your loan officer so that you can properly transfer and document the gift funds.

Happy home buying!


Mark Fitzpatrick is a California-based mortgage banking veteran. You can follow Mark on Google+ or on Twitter. NMLS #382064. Contact: MortgageMusings

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