How to use gift funds for your loan down payment
As I prepare homebuyers to navigate Boston’s hyper-competitive markets—whether they’re first-timers or multi-homeowners—I inform them that family money has become a significant force behind area home sales. (More than half of my buyer clients are using family funds of some kind.) With inventory super-tight and competition quite stiff among homebuyers, those who can are marshaling extra funds to support higher-priced (and often low-contingency) purchases.
If you’re a buyer planning to purchase with a loan, keep in mind that other competing buyers may be tapping funds from retirement accounts or borrowing from family trusts (in some cases, allowing them to buy in all cash, and then get a mortgage after closing to repay the trust fund).
So to compete in that landscape, getting a gift from a family member can make all the difference. The process is straightforward, and well worth considering.
Here’s what a lender needs in order to allow gift funds for a down payment:
- The purchase must be for the purpose of immediately owner-occupying (not renting out)
- The gift must be from a direct family member (defined as a borrower’s spouse, child, dependent; any individual related by blood, marriage adoption or legal guardianship; or fiancée/domestic partner).
- The donor must be willing to sign a gift letter prepared by the lender indicating the following: the donor’s name and relationship to the borrower, the donor’s contact information, the address of property to be purchased, the gift amount, and a stipulation that no repayment is required. The letter must be signed and dated by both the donor and the borrower.
- Additional documentation such as copy of the gift check and donor bank statements may be required, depending on the loan program.
Before making any final decision, both parties should speak with a qualified tax professional to discuss tax implications related to giving or taking gift money.
Many thanks to loan officer Nick Marlin for providing this list of lender requirements. Nick (NMLS# 1051196) is a member of the Andrew Marquis team at Guaranteed Rate.
Photo: A gift of independence, by Ervins Strauhmanis via Flickr (Creative Commons License 2.0)