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Use gift money when buying a house

Gift Funds for Down Payment and Closing Costs

Gift funds are sometimes a very misunderstood closing costs solution. Receiving gift money is a very way that first time home buyers are able to afford to buy a house.

There are 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

How to Write a Gift Letter

When receiving a gift, it must be accompanied by a letter that includes all of the following information.

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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.

Most loan officers and lenders will have a copy of a gift letter that you can use as a template.

Transferring Gift Funds

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.

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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.

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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.

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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.

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.

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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?

About Your Expert

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

Leave a Question or Comment About this Topic

  • Jo says:

    We are quickly approaching closing and my parents gifted us funds, but they are telling us that we can’t use it unless they see their account, which they are not willing to give. Is there any way around this? At this point what can I do? My parents aren’t allowed to gift us money just because? I wasn’t aware of this until I already deposited the check.

    • Scott Schang says:

      Hi Jo, I’m really sorry to hear about this “last-minute surprise”, but then again, it doesn’t surprise me. It sounds like you got stuck with an inexperienced loan officer that didn’t have this conversation with you before you ever opened escrow.

      The use of and documentation of gift funds may vary depending on the type of loan you’re usings.

      The one thing you never want to do is to accept a check from a gift donor, and deposit that into your bank. This creates the source and seasoning questions you’re encountering now. If you accept a check within 60 days of needing the money, you need to prove where that money came from and show the paper trail (copy of check deposited and documentation to prove your parents had the money to “gift”)

      Unfortunately, at this point, your parents are probably going to have to be ok providing whatever documentation is required to prove that they didn’t borrow the money themselves to give to you.

      We typically advise that any gift funds be wired directly to escrow, this avoids a lot of the paper trail you now have to provide.

      Try this, ask your loan officer what documentation is required if your parents wire the money directly into escrow, or the closing attorney. If that documentation is less burdensome on your parents, and if they have the money, have them send you the gift that way, and you can return the original gift to them once you close.

      If none of those things work, unfortunately, because your loan officer didn’t have this conversation with you before you found a home, you may be out of options.

      There is absolutely no reason why your parents should be concerned about providing proof that they have the money to gift you. They may not understand what documentation they need to show and why. It’s literally to make sure there is no fraud going on.

      I know, this is a hard place to be right now, but it really shouldn’t be that big of a deal. Hopefully your loan officer or an underwriter and explain to your parents what is needed and why and they will feel more comfortable with the whole situation.

      Hope this helps?

  • jennifer says:

    Does it raise red flags if i was given Gift funds from more than one person? Also can the gift funds cover the deposit and closing cost or does it have to cover just one ?

    • Scott Schang says:

      Hi Jennifer, this is a really good question! No, it will not raise red flags if you have multiple gift donors.

      Gift funds from an acceptable source can be used for either down payment or closing costs. Check with your loan officer about the specific gift guidelines for the type of loan program you’re applying for.

      Hope this helps?

  • Guest says:

    So if I received a gift fund would it be applied in my closing cost package as a credit ? Or how is there proof of it even going towards the down payment or such as?

    • Scott Schang says:

      This is a really good question! Some “credits” can only be used for closing costs, but not down payment. For example, if the lender gives you a closing cost credit, or if the seller of the home or your real estate agent give you a closing cost credit, that cannot be used to cover your down payment.

      A Gift from an acceptable source can be used for either down payment or closing costs. When it comes time to close your loan, the down payment is lumped in with the total amount you have to bring to the closing table at the end of the process.

      The funds to cover closing costs and down payment will be reviewed by the underwriter to make sure that the funds are being properly applied.

      Does this make sense?

  • Nik says:

    Hi Scott..
    We are planning on purchasing a house, I am the only one listed on the mortgage, my wife will be writing a check for the initial deposit. Does the money have to be seasoned in her account before she writes a check? She was wired some money and some were check deposits.


    • Scott Schang says:

      Hi Nik,
      Great questions here and they bring up more questions.

      Good morning Nik, there are a couple of nuances here that might affect the answer to your questions. 
      1. What kind of loan are you applying for? The type of loan, FHA or Conventional or other, may affect the receipt and documentation of the gift.

      2. Is the money seasoned? – typically, anything that is in your account for 2 statements (60 days) is considered sourced and seasoned.  Not necessary to show where the money came from if it’s sourced and seasoned.
      3. Why isn’t your wife on the loan?  Does she not show income, or is there another reason?
      4. What did your loan officer say?  

      If you’re not working with someone that you really trust, I can introduce you to someone that I know and trust that can help you with these questions, and any other questions. 

      It sounds like there may be a few moving parts to your scenario here that will require an expert to avoid surprises.

      I also replied to your email with very similar questions. We’ll get this figured out 🙂

      Hope this helps?

  • Rick says:

    Is your cousin acceptable to give a gift letter for an FHA loan?

    • Scott Schang says:

      Hi Rick,

      FHA guidelines do not specifically state that you cannot get a gift from cousin. You should only have to explain the relationship.

      If your loan officer is saying “no” – it might be an overlay by the lender, and not an actual guideline.

      If you need an introduction to a loan officer that is experienced with FHA and gift funds, feel free to shoot me an email to scott@findmywayhome.com, and let me know what State you’re buying in.

      Here is the actual wording in the FHA manual. Hope this helps?

      (2) Standards for Gifts
      (a) Acceptable Sources of Gifts Funds

      Gifts may be provided by:
       the Borrower’s Family Member;
       the Borrower’s employer or labor union;
       a close friend with a clearly defined and documented interest in the
       a charitable organization;
       a governmental agency or public Entity that has a program providing
      homeownership assistance to:
      o low or moderate income families; or
      o first-time homebuyers

      • Haydee says:

        What do you mean “clearly defined documented interest” if $ gift is from a close friend?
        Thank you

        • Scott Schang says:

          Hi Haydee, the FHA underwriting guidelines do not further explain what this means. It would be open to the interpretation of the underwriter, using the guidance of the lender that they work for.

          The assumption is that it would have to be a REALLY close friend that would just “give” you thousands of dollars with no expectation of repayment. You must overcome the burden of proof beyond a reasonable doubt that it is indeed a gift, and not a loan.

          Most underwriters would probably shy away from a gift from a friend.

  • rhonda says:

    I am closing on a home in November. I know my bank account has to show the amount for closing. Does it have to show at least one mortgage payment amount also? Thanks.

    • Scott Schang says:

      Hi Rhonda,

      This is a great question, and I’m glad you’re asking this well before the closing date. The money required to close includes your down payment, lender and third party closing costs, and any required reserves required by the lender. Your question is specifically referring to “reserves”, which is a fancy way of saying that you have a number of mortgage payments in savings at the time of close.

      Reserves are determined by the lender at the time you received your loan approval. Depending on the type of financing that you are using (conventional, FHA, VA, USDA or other), there will be different reserve requirements. Conventional financing will typically require a minimum of 2 months reserves, whereas FHA financing may not.

      You need to ask your loan officer if any reserves are required in addition to your down payment and closing costs. Your Loan Estimated or even your Closing Disclosure will not reflect any required reserves, so it’s important that you ask this question of your loan officer to avoid any surprises at the closing table.

      The good news is that in most cases, gift funds can be used as reserves. What reserves that are required will be specific to your loan approval. There is not a “one size fits all” answer.

      Hope this helps?

  • Trevor Giggins says:

    Does the entire amount of gifted funds need to be applied towards the purchase of the home

    • Scott Schang says:

      Great question Trevor! Gift funds can be applied toward down payment or closing costs unless there is a condition to the gift. It’s always important to remember that a lender or real estate agent can give you a closing cost credit, but cannot ever be used for down payment.

      Your own money, or a gift from a qualified source can be used toward down payment. Certain buyer assistance programs can also be used toward down payment.

      At the end of the day, there is a total on your closing statement that will include the down payment, minus any good faith deposit you submitted with the offer, and your portion of the closing costs as agreed upon during the offer process. As long as the down payment portion comes from an approved source, any access can be used toward closing costs.

      Hope this helps?