Homeownership is a very exciting prospect, but paying for a new house can be daunting. In this article, we share how your family can contribute funds to help you take this important step!
Being able to purchase a new home with financial assistance from your family is a wonderful opportunity. To help cultivate a positive relationship (and borrowing experience), make sure to set clear expectations about gift funds at the onset and inform relatives that they will be required to share some personal financial information, including bank statements.
Following are gifting guidelines for conventional, FHA and VA loans:
Conventional Loan
If a homebuyer is purchasing a primary residence, monetary gifts from relatives may be used for all or part of the funds needed for the transaction. If the property will be a second home, the borrower must contribute 5 percent of the down payment from his or her own funds. Any additional funds needed for the transaction may come from a gift.
The donor can be the borrower’s spouse, child or other dependent; others related by blood, marriage, adoption or legal guardianship; or fiancé, fiancée or domestic partner. If the donor is a real estate agent and the gift is part of the commission on the specific transaction, the gift may only be used to pay closing costs.
Important to note: The donor can’t be affiliated with the builder, developer, real estate agent or any other interested party to the transaction unless there is a preceding relationship as described above.
Gifts must be evidenced by a letter signed by the donor—called a gift letter. The gift letter must:
- Specify the dollar amount of the gift
- List the date the funds were transferred
- Include the donor’s statement that no repayment is expected
- Indicate the donor’s name, address, telephone number and relationship to the homebuyer
When a gift from a live-in relative or domestic partner is being pooled with the borrower’s funds to make the down payment, the following items must also be included:
- A certification from the donor stating that he or she has lived with the borrower for the past 12 months and will continue to do so in the new residence
- Documents that demonstrate a history of borrower and donor shared residency. The donor’s address must be the same as the borrower’s address. Examples include but are not limited to: a copy of a driver’s license, a bill or a bank statement.
The donor must provide documentation that sufficient funds to cover the gift are either in the donor’s account or have been transferred to the borrower’s account. Acceptable documentation includes any one of the following:
- A copy of the donor’s check and the borrower’s deposit slip
- A copy of the donor’s withdrawal slip and the borrower’s deposit slip
- A copy of the donor’s check to the closing agent
- A settlement statement showing receipt of the donor’s check
When the funds are not transferred prior to settlement, the gift funds must be given to the closing agent in the form of a certified check, cashier’s check or other official check.
FHA Loan
Gifts may be provided by:
- A family member
- A close friend with a clearly defined and documented interest in the borrower
Gifts cannot come from the property seller or any person who financially benefits—directly or indirectly—from the transaction or anyone who is or will be reimbursed—directly or indirectly—by the seller or a person who benefits financially from the transaction.
Donor’s funds must be in a bank account. Cash on hand is not an acceptable source of donor gift funds.
A gift letter is required and must include the following information:
- The donor’s name, address and telephone number
- The donor’s relationship to the borrower
- The dollar amount of the gift
- A statement that no repayment is required
Documenting the Transfer of Gifts
If the gift funds have been deposited into the borrower’s account, a copy of the donor’s bank statement showing the withdrawal and a copy of the borrower’s bank statement showing the deposit into the borrower’s account will be needed.
If the gift funds are not verified in the borrower’s account, a copy of the certified check, money order, cashier’s check, wire transfer or other official check evidencing payment to the borrower or settlement agent and the donor’s bank statement evidencing sufficient funds for the amount of the gift will be needed.
If the gift funds are being borrowed by the donor, and documentation from the bank or other savings account is not available, the donor must provide written evidence that the funds were borrowed from a permissible source—not from a party to the transaction.
Regardless of when gift funds are made available to a borrower or settlement agent, the gift funds must be provided by a permissible source.
VA Loan
Gift funds can also be used with VA financing, providing the donor does not have any affiliation with the builder, developer, real estate agent or any other interested party to the transaction. A gift letter must:
- Specify the dollar amount of the gift
- Include the donor’s statement that no repayment is expected
- Indicate the donor’s name, address, telephone number and relationship to the borrower
The funds to cover the gift must have been transferred to the borrower’s account or be received by the closing agent at the time of closing.
Acceptable documentation includes any one the following:
- Evidence of the borrower’s deposit
- A copy of the donor’s funds by check/electronic transfer to the closing agent
- The Closing Disclosure showing receipt of the donor’s funds
All in all, it’s great to have family support during the homebuying journey—whether that is financial, logistical, emotional or a combination of the three. Setting clear parameters from the beginning can help ease the process. We hope these tips have been useful! Explore other financing articles.