Many people are looking to take advantage of reduced home prices and low interest rates by purchasing their first home. Buying a home is an exciting time in anyone’s life and can represent the accomplishment of a dream. Excited home buyers race off to tour new construction, historical homes, or quiet ramblers searching for the “perfect fit” for their family. Once the home is found the process switches from a search to a focused effort on obtaining a home loan and closing the purchase so they can get the keys and rent a moving truck.
During this process many home buyers realize they need more money for their down payment. Perhaps closing cost were higher than they budgeted for. Or maybe the home they fell in love with was $10,000 higher than what they were approved for. Regardless of the reason many home buyers are turning to family and friends and using a “gifted” down payment. For this scenario we will use “Grandpa” as the person giving the gift. Grandpa may have been setting money aside for this special day and more than happy to oblige. Using gifted funds for a down payment is not as easy and driving to Grandpas house to pick up the check. There are steps and procedures that need to be followed in order to be in compliance with mortgage programs and lender guidelines.
5 Steps to Using Gift Funds
Create a Gift Letter: This letter is universally required and lets the lender gain an understanding of where the funds are coming from.
Documentation: It is important to create a paper trail for the funds. For example if Grandpa is gifting you the money and has had it in a special investment account – paperwork needs to be produced showing the funds were in his account and liquidated then put into the bank account the gift is coming from. In this example that would be three separate documents. If Grandpa is simply pulling money out of his checking account a simple bank statement along with the check will suffice.
Copy the Check: Make a photocopy of the check prior to depositing it.
Deposit the Funds: Deposit your gifted funds in one transaction into the same bank account you will be pulling any remaining down payment funds from. It is easier than trying to document funds coming from multiple sources. Collect your receipt and keep it with the check copy and gift letter.
Make sure it Matches: It is important that the dollar amount on the gift letter, check, and receipt all match. Do not make a deposit and get partial cash back thinking you will replenish the funds later. It has to all match otherwise you may not be able to use the funds for your down payment.
Gift letters should include:
The names and contact information of both parties
The amount of the gift
The address of the property you are purchasing
The relationship between you and the person giving you the funds
A statement that the money is a gift not a loan
Having family members that are wiling to support your dreams to purchase a home is a wonderful thing. Understanding the process is important to ensure that it is seamless and painless for the person gifting the funds and for you. A mortgage banker can walk you through the process in even greater detail and coach you along. Gift funds can be a fantastic resource when used correctly. Contact your mortgage lender to learn which mortgage programs best fit your needs and how to get started.
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