Are Gift Funds an Option When Buying a Home?
So you’ve decided to buy a home and have begun the mortgage paperwork process. However, you’ve run into a snag: the down payment and closing costs are more than you anticipated. So, now you’re wondering if there is any way to continue with the mortgage process. Luckily, there is an option: You can utilize gift funds!
A gift fund is money that is given to you for your down payment or closing costs. The money must come from a family member or friend and must be a gift; not a loan. Your loan officer will require detailed documentation for the gift fund. This letter must include the name of the person gifting you money, their relationship to you, the date the money is gifted, the amount of the gift, and a statement saying there is no expectation of repayment.
Which loans allow gift funds?
- Conventional Loans allow gift funds to be used as a portion of the down payment, or the gift funds can pay all of your down payment if you’re putting down 20% or more.
- The VA Loan allows gift funds to be used as a portion of the down payment.
- FHA Loans allow gift funds, but they are subject to FHA guidelines.
- The USDA Loan has no down payment, but borrowers are able to use a gift or grant toward the mortgage.
How much can a person gift you?
The amount you’re eligible to receive as a down payment gift depends on the mortgage loan you’re using. Additionally, the person giving you the gift amount has limitations regarding gift funds as well. According to the IRS, gifts are subject to annual exclusions. For 2018, the annual exclusion is $15,000, meaning people who wish to help out family members or friends with a down payment can give up to $14,999 to an unlimited number of people each year and still face no federal gift tax*. For example, parents could each give their son and daughter-in-law $12,000. That’s $24,000 for the son and $24,000 daughter-in-law (or $48,000 total).
Also, make sure that you receive the gift check from your gift giver with plenty of time to spare. It takes time to have a sizable gift processed with your bank. Moreover, your loan officer will need all the required documentation before the closing can be scheduled. It is always important to be timely when it comes to the mortgage process. Speaking of timely….
What is “Seasoned Money”?
If you like to plan ahead for big events, you may end up falling into the category of something called “seasoned money”. Seasoned money is money that has been in your account prior to the bank statements your loan officer will request. Typically, your loan officer will require you to supply the last two months of your bank statements. Therefore, if you have had the money in your account for four months and they only need the past two months, those funds are seasoned and more than likely will not need gift documentation. For instance, if your grandparents gifted you $12,000 four months ago to help you with buying a house, the loan officer probably won’t ask about it.
When it comes to buying a home, just remember that every situation, every loan, and every gift fund is different. That is why you need a trusted loan officer to help you determine which home loan best suits your needs. Make sure that your loan officer knows that you intend to use gift funds. If you would like to learn more about home loans, gifts funds, and how to begin your mortgage journey, contact the loan office closest to you for more information.