How More Buyers Are Securing Homes with Gift Funds

Today’s market for real estate is challenging; first-time homebuyers face mounting hurdles to homeownership. Rising home prices and increased mortgage rates have made saving for a down payment trickier. Thus, many buyers resort to the support of family and relatives for gift funds. If you are dealing with buyers intending to receive help with down payment from family and others, the following points should be shared with them.

What Are Gift Funds?

Home buyers receive a gift fund as a monetary contribution for their down payment or closing costs. Unlike loans, the land gift funds do not require repayment, but mortgage purposes require documentation. Different loan programs have various rules concerning who may provide gift funds and under what circumstances.

Loan-Specific Gift Fund Guidelines

FHA Loans

The Federal Housing Administration (FHA) has strict guidelines regarding gift funds. Acceptable sources include:

• Relatives (parents, grandparents, siblings, aunts, uncles, etc.)
• Close friends with a documented interest in the borrower’s well-being
• Employers
• Labor unions
• Charitable organizations

FHA requires thorough documentation, including a gift letter that details the donor’s relationship to the buyer, the amount given, and a statement confirming that the funds are a gift rather than a loan.

Conventional (Conforming) Loans

Fannie Mae and Freddie Mac loans require gift funds to be provided only by a close relative, spouse, adoptive parent, or legal guardian. For a property containing two or more units, the buyer must contribute a minimum of 5% of the down payment from his or her funds. Documentation showing the transfer of the gift through a signed gift letter, along with proof of the transfer of funds, will be required.

VA Loans

In contrast, the Department of Veterans Affairs (VA) has quite relaxed rules on accepting gift funds, as they can come from almost anywhere—be it from family, friends, or even charitable organizations. The lender, however, will still require a gift letter as well as support documentation for the transaction.

USDA Loans

Gift funds can come from many sources in the case of USDA loans, which are meant for rural property purchases. Buyers must document the withdrawal and transfer of the funds along with submitting a gift letter.

Important Documentation for Gift Funds

Lenders require clear documentation to verify that gift funds are legitimate. Here’s what buyers should prepare:

1. Gift Letter – A written statement including the donor’s name, address, relationship to the buyer, amount of the gift, and a declaration that the funds do not need to be repaid.
2. Proof of Transfer – Bank statements showing the withdrawal of funds from the donor’s account and their deposit into the buyer’s account.
3. Verification of Donor’s Ability – Some lenders may require proof that the donor has the financial means to provide the gift.

Key Takeaways for Buyers

• Gift funds can make homeownership more accessible but must be properly documented.
• Loan programs have specific rules about who can provide gift funds and how much documentation is required.
• Buyers should communicate with their lender early in the process to ensure they meet all requirements.

Navigating the home-buying process with gift funds can be complex, but The Windrow Group is here to help. If you or someone you know is considering using gift funds for a home purchase, reach out to us today for expert guidance!