Gift Funds for Down Payment and Closing Costs

by on 8.22.15 in Qualifying

Gift Funds Can Be Used for Down Payment or Closing Costs

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:

  • It must come from a Relative that is related to you through blood or marriage
  • It must be accompanied by a Gift Letter – See below for Gift Letter requirements
  • It must be sourced and seasoned if received within 60 days of you applying for a mortgage

According to HUD, your Gift Letter must specify 10 Things:

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  1. The dollar amount
  2. Name of donor
  3. The donor’s signature
  4. Address
  5. Telephone number,
  6. Relationship to the borrower
  7. The borrower must be named
  8. The borrower’s signature(s)
  9. The letter must state that no repayment is required
  10. Include language asserting that the funds were not made available to the donor from any person or entity with an interest in the sale of the property.

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.

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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.

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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.

Creative Closing Costs Solutions

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.

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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?

11 Comments
  1. we are in the loan process now. we intended to use 4,500 from my husband’s business account for closing costs, but our lender says without a letter from the accountant saying that using said amount will not cause hardship to his business. we cant use it. the accountant wont right the letter because she says that is an opinion, and as a professional all she can provide are tax related information they have prepared in the past. So we asked my son for the money, he is says he has the amount of 4,000 saved up in cash, as he is in the navy. He says he can wire us the money or send us a cashiers check. is that ok? he already wrote us a gift letter as you mentioned above. Thanks Scott

    comment by BARBARA C HOLDEN
    on 4.24.17 at 12.32 pm
    1. Hi Barbara,

      I answered you through an email directly, but this is a great question, and want to share the answer with other readers.

      Always have your gift wired directly to escrow. Try to avoid having the gift sent to you, and then you send it into escrow. By receiving the gift first, that opens up a can of worms and requires much more paperwork showing the transfer of funds between you and the person that sent you the gift.

      The easiest, and less paperwork strategy is to have the money sent directly to escrow.

      Hope this helps?

      comment by Scott Schang
      on 4.24.17 at 8.03 pm
  2. ??

    comment by Kevin A
    on 1.15.17 at 8.23 am
  3. I had planned to buy a mobile home AFTER my car was paid off , however the rate at which the old place deteriorated was much faster than expected , so I had to act pretty quickly

    Credit was approved
    Income is good
    All those forms submitted
    Appraisal about to be ordered

    But Im a bit worried because we didnt have 5 or 8 months to save and plan for this , so we are basically doing the entire closing costs like 6 k off of GIFTED funds

    Im worried because I hear all kinds of chatter about “spending habits” and you must have the 6 grand just laying around for awhile to appeal to an underwriter etc

    Because Im having to do this does this mean Im wasting my time?

    comment by Kevin A
    on 1.15.17 at 8.23 am
    1. Hi Kevin, I’m not sure if I completely understand your question. Have you spoken to your loan officer about this? If you are approved for financing, you should be ok. I’m not sure what kind of “chatter” you’re listening to, but you should only listen to your loan officer.

      In some cases, an underwriting approval would be dependent on you have “reserves”. This is just money left over to mitigate the risk of a small financial hardship causing you to default on your mortgage.

      Again, I would not worry about this unless your lender is asking for it. If your lender is asking that you have reserves, you only need to have that money in a liquid account at the time of close. Nobody is going to monitor your savings or spending habits once your loan closes.

      comment by Scott Schang
      on 1.15.17 at 10.43 am
  4. ScottSchang cherz He says that chapter 13 automatically reaffirms because its just a restructuring of the debit. So now the search for an attorney that is well versed in the laws. If you know of any that can help me? that would be great. I don’t know if I have to use one in Idaho since the property was in Calif.
    Thanks Cheri

    comment by cherz
    on 8.30.16 at 3.46 pm
  5. cherz ScottSchang I have not encountered this Cheri.  It sounds like the mortgage was reaffirmed?  It does make sense that it’s different than a Chapter 7, but I am not a BK attorney so I cannot say how they differ.
    Oh boy, I’m sorry I cannot offer something more concrete.  Good luck!

    comment by ScottSchang
    on 8.30.16 at 3.41 pm
  6. ScottSchang cherz Because chapter 13 is only restructuring and not a protection. Only protected while bk is open. I am so confused why everything I read or am told is different.

    comment by cherz
    on 8.30.16 at 3.31 pm
  7. ScottSchang cherz He just said that once its been discharged they can report because its not protected like in a chapter 7

    comment by cherz
    on 8.30.16 at 3.26 pm
  8. cherz Yes, they can transfer the servicing anytime they want.  When a lender transfers the loan like that, it does not affect the terms of the loan at all.  The only difference is you would send your payments to a new lender.
    I’m really curious to see what comes out of this.

    comment by ScottSchang
    on 8.30.16 at 3.22 pm
  9. I have one more thing to ask before I get an attorney. Nationstar just told me that once the bankruptcy is closed all posting to that account goes back to normal. My chapter 13 does not protect me from this, and basically reaffirmed the loan with them because that is how a chapter 13 works. This note was transferred from BofA June 30 2013 and I confirmed with them today that it was transferred to them while the Bankruptcy was open. Are they correct?

    Thank Cheri

    comment by cherz
    on 8.30.16 at 3.15 pm
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