Key Takeaways
- Many homebuyers count on cash gifts to use toward their down payment when purchasing a home.
- But, there are rules and guidelines that need to be abided by in order to make that work.
- Before you ask your sister’s best friend’s uncle for a cash gift, make sure you understand these nuances of cash gifts!
- Learn more with SindeoOne
Before you sit down with a cup of hot chocolate to make your holiday wish list, you may want to think twice about asking for down payment assistance on your new home this holiday season. While it may sound like a great idea (and many people do count on cash gifts when purchasing a home), there are some intricacies to making this work.
Here’s what you need to know about cash gifts:
#1. Rules Do Apply
One of the first things you need to know is that there are limits to how you’re allowed to use cash gifts for your down payment and purchase. Property type is one consideration. With a conventional loan, for example, you can only use gift money if you’re buying a primary or second home —not an investment property.
With FHA and VA programs, the usage is limited to purchasing a primary residence that you’ll be occupying.
Loan type also plays a role, as the composition of your funds for a down payment can be restricted depending on the type. If you put down 20% or more on a conventional mortgage, for example, it can all come from a gift. However, if you put down less, part of the contribution must be from your own funds.
With FHA and VA loans, all of your down payment can be from a gift —but, if your credit is below certain thresholds, a portion of your down payment must include your own money.
#2. Santa Can’t Help
We know, bummer. In general, lenders require that gifts used for down payments must come from family members. There can be case-by-case exceptions, but you’ll need a strong argument. A very close family friend who’s acted as a second mom all your life might qualify, but your college frat brother probably won’t fly.
#3. It Must Be No-Strings-Attached (Seriously)
Your lender will want to make sure that the money you’re getting is truly a no-strings-attached gift. If the money is a loan in disguise, that will impact your financial picture and potentially your ability to meet your mortgage payments.
To prove the cash is yours free and clear, you’ll need your benefactor to write a gift letter. It should include all of the following:
- The gift giver’s name, address and phone number
- Their relationship to you
- The exact dollar amount of the gift
- The address of the property the gift will be used to purchase, if known
- A declaration that the gift is not a loan, and is not expected to be repaid
- The gift giver’s signature and the date
- It’s also possible the lender will need the giver to provide bank statements
Keep in mind that your lender may also ask you to provide your own bank statements and a paper trail.
#4. Have a Paper Trail
A strong paper trail behind your cash gift is a vital part of the process, as lenders want to know exactly where the money came from. This helps make sure the money hasn’t been laundered or funneled in by some suspect source. Consider the following paper trail example:
Your mom has decided to sell some stock to give you a cash gift:
- She needs to document the sale of the stock, as well as the transfer of the proceeds from her brokerage account into her bank account.
- She then needs to write you a check from that bank account, which is much easier to document (with a photocopy of the check) than a wire transfer.
- When you get the check, make a copy. Deposit it, in person, into the exact account from which all your money at closing will be drawn.
- Don’t deposit other checks at the same time; co-mingling funds can create confusion.
- Get a real paper receipt.
#5. The Exceptions
Like most things, there are exceptions in the world of cash gifts. Not all gifts need this much documentation. For the most part, lenders are concerned about large infusions of cash —but “large” can depend on your lender.
If you’re getting a conventional mortgage, lenders are often looking for cash contributions that are larger than 50% of your total monthly income. Other programs, like FHA loans, look for 25%.
If your income is $4,000 a month and you deposit $6,000 from your favorite sister, you can almost guarantee you’ll need plenty of paper to verify the source. However, a $50 contribution from your long-lost cousin probably isn’t a concern.
#6. Let it Season
Getting a cash gift at the last minute can cause a lot of hassle. If you know you’re going to be shopping for a home, make sure the money hits your account at least three months before providing your bank records to your lender. Most want to see two complete months of bank statements, so deposits made farther back in time would be “seasoned” enough not to warrant a closer look.
Find Out Where You Stand
Holidays or not, when you’re buying a home … time is money. With our recent release of SindeoOne, homebuyers can shop and compare over 1000 loan programs by filling out a single application in just 5-minutes.
Learn more about the loans that best suit your unique needs (and whether or not your great grandmother twice removed can gift you a chunk of change) by connecting with one of our Sindeo team members today!