By Sabrina Karl
With first-time homebuyers often struggling to save a down payment, gift money from their family can be a welcome fix. But simply transferring funds from the Bank of Mom & Dad to Johnny’s bank account won’t alone solve the problem. Both giver and recipient need to follow certain gift money rules.
First, the type of mortgage being applied for, as well as the borrower’s credit score, will determine how much personal investment is required in the down payment vs. how much can come as a gift. For instance, FHA loans have different rules on this than conventional mortgages, so the first step is learning the rules for the particular loan and situation.
Also note that down payment gift money must generally come from a family member, such as a parent, grandparent, aunt or uncle, or a sibling. Gifts from friends are typically not allowed, but contributions from a spouse, domestic partner, or fiancee usually are accepted.
Once the allowable gift amount is determined, be aware that all lenders will ask to see 2-3 months of bank statements. So any large, non-routine deposits that show up during that time period will need to be explained and documented.
Specifically, a gift deposited within that 2-3 month window will need to be confirmed with a gift letter from the donor. Most importantly, this letter establishes the relationship of the giver to the recipient and explicitly states that the money provided is being gifted, not loaned, with no expectation of the donor being paid back.
Gift money can be an excellent way to help new buyers get into their first home a little sooner than they would be able to on their own. The trick is simply doing your homework so both giver and lucky recipient can satisfy the lender’s requirements.