Many people are looking to take advantage of reduced home prices and low interest rates by buying their first home. Buying a home is an exciting time in anyone’s life and can represent the realization of a dream. Excited homebuyers rush to tour new construction, historic homes, or laid-back walkers in search of the “perfect fit” for their family. Once the home is found, the process shifts from a search to a focused effort on obtaining a home loan and closing the purchase so that they can obtain the keys and rent a moving truck.
During this process, many home buyers find that they need more money for a down payment. Perhaps the closing costs were higher than budgeted. Or maybe the house they fell in love with was $ 10,000 more than they were approved for. Regardless of the reason many home buyers turn to family and friends and use a “gifted” down payment. For this scenario we will use “Grandpa” as the person who gives the gift. Grandpa may have been saving money for this special day and is more than happy to please you. Using gift funds for the down payment is not so easy and driving to the grandparents’ house to collect the check. There are steps and procedures that must be followed to comply with mortgage programs and lenders’ guidelines.
5 steps to using gift funds
- Create a gift letter: This letter is a universal requirement and allows the lender to understand where the funds are coming from.
- Documentation: It is important to create a paper record of the funds. For example, if your grandfather is giving you the money and has had it in a special investment account, you must submit the paperwork that shows that the funds were in your account and settled and then put it in the bank account from which the money came. present. In this example, it would be three separate documents. If Grandpa is simply withdrawing money from his checking account, a simple bank statement along with the check will suffice.
- Copy the check: Make a photocopy of the check before depositing it.
- Deposit the funds: Deposit your gifted funds in a transaction into the same bank account from which you will withdraw the remaining funds from the initial payment. It’s easier than trying to document funds from multiple sources. Collect your receipt and keep it with the check copy and gift letter.
- Make sure it matches: It is important that the dollar amount on the gift letter, check, and receipt match. Do not make a deposit and get a partial cash refund thinking that you will replenish the funds later. Everything must match, otherwise you may not be able to use the funds for the down payment.
Gift letters must include:
- The names and contact information for both parties.
- The amount of the gift
- The address of the property you are buying
- The relationship between you and the person giving you the funds.
- A statement that the money is a gift, not a loan.
Having family members who are willing to support your dreams of buying a home is a wonderful thing. Understanding the process is important to ensure it is smooth and seamless for the person giving the funds and for you. A mortgage banker can guide you through the process in greater detail and guide you. Gift funds can be a fantastic resource when used correctly. Contact your mortgage lender to find out which mortgage programs best suit your needs and how to get started.
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