November 13, 2020

How to use gift funds for your down payment

Many people believe that it always takes a 20% down payment to buy a home, but that's not reality.

You can actually buy with less than 20% down with some programs, but today, we're going to be talking about gift funds. This is usually when a family member steps in to help out with some of the down payment if you don't have it all saved up yourself, but there's some specific things we need to keep in mind when we're talking about gift funds.

First of all, we'll need a gift letter. As your lender, we'll provide this form, but this is to be signed by all parties, not just you as the borrower. The letter clearly identifies:

  • Who's donating the money
  • Who's gifting it
  • From what account is the money coming, and
  • How much the dollar amount is

We may need to verify the actual source of the funds in the form of a bank statement from the donor to show that they have the money to gift in the first place. Not all programs require this, but we do need to at least verify where the funds are coming from. As an important side note, we CANNOT use cash. Don't let somebody give you a whole bunch of money and then just put that in your account. That won't work. We have to trace it back to the donor.

That leads us to the third thing: How do we get the money from the donor? It's very common for somebody to write you a check, and then you deposit it; sometimes, the donor can transfer it from their account to your account. One of the simplest and easiest ways is to have that donor wire the money directly to escrow. It cuts down on a lot of documentation, it’s easier on everybody, and, trust us, it's going to make for a smooth transaction.

If you have questions about gift funds, contact us. There's lots of nuances, but we're here to help.

Watch our video on this topic here.