Thursday, November 5, 2015

How to properly give or receive a downpayment gift for your home purchase...

A few years ago I was quoted in a USA Today article about parents who provide their adult children downpayment "gifts" for their home purchases. This is extremely common, and financial gifts are generally permissible with FHA loans, VA loans, and Conventional loans, though usually my clients do not understand the process in order to give or receive a financial gift. Lenders and loan underwriters have very specific processes in order to document the "source and seasoning" of financial downpayment gifts...

If you are a home buyer looking to give or receive a financial gift, I would NOT recommend just writing the recipient a check or transferring funds into that person's account. Generally, it is much easier for the person giving the gift to hang on to their own funds, and then deposit them on the recipient's behalf directly into the escrow for the transaction when that time comes. This is much cleaner and there are fewer steps to trace and document.

Just what do I mean by "source and seasoning" you may wonder? Well for one thing, lenders will not let just anyone give a buyer a financial gift. Generally gift funds needs to come from a family member, such as a parent, grandparent, sibling, child or even a spouse, if that spouse is not on the loan. In addition to this, the gift funds must be "sourced" directly from this family member's bank account. The family member will need to provide the lender bank statements and a trail of where the money came from. Seasoning refers to the fact that lenders want to see that these funds were not recently acquired -- they prefer to see funds that have been "seasoned" in an account for at least a few months.

The lender will require that the financial gift giver write a letter stating a few things; (a) the amount of the gift being given, (b) the property address of the home being purchased, (c) your relationship to the person receiving the gift, and (d) that the money is NOT a loan and that it is a gift that does not have to be repaid.

All lenders will have their own specific requirements, however these generally are the most common when giving or receiving a financial gift. Many of my transactions with first time home buyers involve the use of gift funds -- this is extremely common and it is pretty cool to see! I have had clients give and receive financial gifts anywhere from $1,000 to augment a buyer's downpayment, to a full 20% downpayment, and everything in the middle.

No comments: