How to Buy a Home Using Gift Funds

Gift funds are used often for purchasing a home. Typically, the gift is given by a parent or grandparent. If you're in a situation where you plan to use gift funds for buying a home, you should understand how this works.

It's not as straightforward as accepting the gift and buying the home. Nothing in real estate is ever that simple. Here's a quick guide to help you understand how to use gift funds when buying a home.

Who can Give you Gift Funds?

Before you go any further, it's important to understand where you can get gift funds from. This will depend on the mortgage program you plan to use.

Those using a Fannie Mae, Freddie Mac or VA Mortgage program, also called conventional loans, will only be able to receive gift funds from an immediate or close extended family member. If you plan to use an FHA mortgage, you will have more options for gift funds including:

  • Family or close extended family
  • Government agencies
  • Nonprofits
  • Employers
  • Labor unions

You will want to make sure you check the HUD guidelines when it comes to the labor union or employer option, however.

How much of Your Down Payment can be from Gift Funds?

When you plan to use gift funds to buy a home in Charlotte, you need to know how much of your down payment you can pay with these funds. If you're after a conventional loan, you can use gift funds for your entire down payment.

Those seeking a VA home loan or FHA loans will also be able to pay the entire down payment through gift funds. However, if you have a lower credit score, you may have to pay some of the down payment in cash.

Getting Your Gift Letter in Order

Before you can use gift funds for a down payment, you will need a gift letter. The reason for the gift letter is for the lender to ensure the gift was actually a gift and not another loan disguised as a gift. Your gift letter will need to have the donor's contact information and their relationship to you in it. In addition, you will need to have all the gift specifics in the letter including the amount, when the funds were transferred and the address of the home you intend to purchase.

It's also important to make sure the person giving you the gift signs the letter stating the funds are actually a gift to you.

A Few Scenarios for Gift Funds

While using gift funds to buy a home in Charlotte isn't exactly straightforward, it doesn't have to be super complicated. It's always best to speak with your lender for specifics as they may differ from one loan program to another. Let's look at a few scenarios for gift funds.

College Graduation Money

Maybe you've graduated and hauled in a substantial amount of cash from family and friends. You can use this money to help with the down payment of a home, but it's a bit inconvenient, to say the least. You may have to request a gift letter for each check, which could take forever.

However, your lender will take a look at your bank statements for large deposits or multiple deposits. If the checks were for $50 or less, at least most of them, you'll likely have nothing to worry about. However, if they were larger, you will likely need to get a gift letter for those larger checks.

Wedding Money

Similar to the college graduation situation, you will likely run into needing a gift letter if you were given a rather large check for your wedding. Even if you deposited a number of checks for $100+, you may run into a few issues. However, you can use wedding money to help with the down payment for your new home.

Straight One-time Gift

It doesn't matter the occasion, if you receive a gift large enough for your down payment, you will likely need a gift letter. This could be a direct gift from family for the down payment of your home or it could be for a holiday. Regardless, you will need a gift letter for this scenario.

Avoiding the Gift Letter

Since lenders typically only look at the past 2 months’ worth of bank statements, you may be able to avoid a gift letter. Put the gift money in the bank immediately after you receive it. If you buy a home and go through the mortgage process three or more months later, you may not need a gift letter at all. The funds now have become "seasoned" and the source may not need to be revealed.

When using gift funds to buy a home in Charlotte, it's important to understand what you're getting into. You should also make sure the giver of the gift understands that any gift above $13,999 in one year may come with a tax penalty.

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