Using Gift Money for Your Down Payment
If you’re receiving a down payment gift for the purchase of your next home, you’re not alone; many U.S. home buyers do it. Gifts for down payment can come from parents, grandparents, siblings, children, or even spouses on a variety of loan programs including FHA, VA, USDA, conventional, and jumbo loans. But you need to make sure that you “receive” your cash gift properly. If you receive your gift improperly, your loan could be denied.
For most, the goal of gifting money is to make a 20% down payment. With a 20% down payment, home buyers can often qualify for lower mortgage rates and there is no accompanying private mortgage insurance (PMI).
Not everyone receiving a cash gift is looking to make a 20% down payment, though. Gift money is also allowed for low-down payment mortgages including the FHA purchase mortgage, which requires a 3.5% down payment; and the Conventional 97 mortgage from Fannie Mae and Freddie Mac which requires just 3% down. Extra gift money can be used to furnish your new home; make repairs; or establish an emergency fund.
How to Write Your Down Payment Gift Letter
Remember, there’s a right and wrong way to accept a down payment gift. For example, do not randomly deposit your cash gift into a bank account. Make sure to keep an extra-strong paper trail for the money being gifted. The gifter should write a check for the exact dollar amount specified on the gift letter and make a photocopy of the check – one for the gifter’s records, and one for you. Be sure to follow the 3-step process when accepting a cash down payment gift, no matter what type of loan you have.
First, write a gift letter that includes the following information:
- The amount of the gift
- The subject property address
- The relationship of the gifter to the giftee
- A note that the gift is actually a gift and not a loan to be repaid
The gift letter should not contain any “extra” information and should be signed and dated by all parties.
How to Document Your Down Payment Gift
Now that the gifter has written a check to the buyer, the following steps are required. First, with the gift check in hand, you should physically walk into a preferred depository bank to make the deposit in-person. Do not deposit the check online using an app or at an ATM machine. Also, make sure it’s the same bank account from which all of your money at closing will be drawn. You do not want to bring money to closing from multiple savings accounts. When you get to your branch, deposit the gift funds into a bank account, end your transaction, and collect a receipt for your deposit. If you are receiving multiple cash gifts for down payment, you should follow this process for each gift independently.
Don’t hesitate to contact me with any questions about receiving a cash gift. I am here to help you.