Gift funds are sometimes a very misunderstood closing costs solution. Not so much misunderstood as to whether or not you can use them for closing, but how best to receive and use gift funds so that the home purchase goes smoothly for all parties involved, the buyer, the seller and the giver of the gift.
There are a Three very important things that you need to keep in mind when considering gift funds:
According to HUD, your Gift Letter must specify 10 Things:
Sourced means that you have to prove that the giver of the money had the money to give. Seasoned means that either you or the giver of the gift must have had that money for over 60 days – the deposit cannot show up on most recent two bank statements or it will raise questions and require a paper trail.
Simply put – the person that gave you the money has to submit bank statements showing that they had the money available to give as a gift. This can be an inconvenience at the very least to the person that was so kind to try to help you out.
If your parents or a relative gave you money for the purchase of a home longer than 60 days ago (deposit does not show up on last two months bank statements) than this money is not considered by the lender to be a “gift” for the purposes of purchasing this home. It more often than not causes confusion and reluctance on the gift giver’s part to produce the required documentation and can be an uncomfortable situation to find yourself in.
Hopefully you’re reading this before this has become a problem! If your relative is planning on giving you the money at the close of escrow, there is an easy and a hard way to do this. NOTE: Gift Funds should be WIRED into ESCROW at the time of close. This is by far the most simple method.
If you have the money deposited into your account and it shows up in your bank statements for the two months previous to your purchase you’re looking at a rather invasive production of bank statements and paper trail documents from both you and the relative giving the gift.
Wiring funds from the Gift giver to the Escrow company is the absolutely most effective way to receive gift funds. Gift Funds are often limited as to the amount that can be applied toward your Down Payment but are not limited typically when being applied to closing costs for the purchase.
The Relative giving the gift should also be aware of possible tax liabilities of giving gift funds. Here are Frequently Asked Questions on Gift Taxes from the IRS that you should review and provide to the person offering you the gift.
If you are able to get Gift Funds to help with your closing costs, consider using this money to either pay the Upfront Mortgage Insurance Premium (for FHA loans) or to buy down the interest rate to permanently reduce your mortgage payments and save thousands of dollars of interest over the term of the loan.
Any time you have the ability to opportunity to pay higher closing costs to reduce the interest rate or to keep from “rolling in” costs into the loan amount, you stand to save thousands more than the initial cost of paying the cost up front. This is a simple fact that most lenders do not share because of the fear of scaring you away with higher closing costs.
If you are educated on all of your options at least you have the ability to be empowered to make an informed decision about how you would like to structure the financing of your new home.
This is not a decision that a lender should be making for you without even consulting you first. At least that’s my two cents. Do you have any experiences or input that you can share?