Purchasing a home is an investment in the future for many home buyers. This is why parents, relatives, and others who are close to the buyers often want to help them with the purchase by making a cash gift. But using gifted funds to offset part of the cost of the purchase can lead to unforeseen consequences. Singles, couples, and families who are looking for a home to purchase or those who may be planning to do so soon can use the following information to help ensure their home buying process is not thrown off course by the offer of cash from a loved one.
Understanding who can use gift funds
While the use of gifted funds is often mentioned in relation to first-time homebuyers, this money can also be used by repeat home buyers. Some of the most common home loans, including conventional loans, FHA, VA, and USDA Rural Development loan programs all accept gift funds, as long as it conforms to their lending requirements.
Understanding who can give gift funds
Not everyone is able to donate gift funds to a home buyer to be used toward the purchase of a home. In most cases, someone who wants to gift funds to a home buyer must meet relationship guidelines. Acceptable relationships for most lenders include:
- the borrower's spouse, domestic partner, or the person with whom the buyer is currently engaged to marry
- a relative through blood or adoption
- a relative by marriage
- a legal guardian
FHA lenders may also deem employers and some charitable organizations or governmental agencies as acceptable contributors of gift funds for the purchase of a home. Additionally, in limited cases, friends who can provide documentation to prove a long-term friendship, such as one from childhood or college, may also be accepted as gift fund donors.
Understanding what gift funds will not be acceptable
In order for gift funds to be accepted, they must be proven to be a legitimate gift. This means that there can be no arrangement, neither secret nor stated, that implies that the funds are to be repaid by the recipient after the purchase. If that is the case, the money is a loan instead of a gift and cannot be used as gift funds.
In addition, it is important for home buyers to understand that no part of the gift funds can come from any party who is also involved in the sale, such as the seller, lender, loan officer, or real estate agent, even if they are related to the buyers. However, money received from these individuals may qualify to be used toward the buyer's closing costs, if they meet the percentage guidelines under the limits of the interested party lending rules.
Understanding the process for using gift funds
Buyers who will using gifted funds as part of their transaction will need to take several steps to complete the process. These steps include:
- Using an approved gift letter signed by the donor that includes a statement saying that the sole purpose of the money is for purchasing the home and that the money is a gift, with no expectation of repayment, as well as detailed contact and banking information for the donor and an explanation of their relationship to the buyer
- Another step is sourcing the money, using banking records to prove where the money originated and that the donor can afford to make the gift
- Next is the establishment of a document trail that follows the money from the donor source to the buyer or escrow, using bank statements, deposit slips, withdrawal slips, or copies of checks or wire transfers
Gifts that have been in the buyer's bank account for more sixty days or longer are usually considered the property of the buyer and may not need to be proven and documented.
Although the gift fund process can be somewhat of a hassle, it is well worth the time and trouble due to the amount of money it can help buyers save on their home purchase. Buyers who are interested in using gift funds in their home purchase process should discuss the matter with their buyer's agent well before selecting a home or making a purchase offer. Doing this will help buyers ensure that they have a thorough understanding of the process and sufficient time to meet all sourcing requirements for the type of home loan they will be using.