One of the most daunting parts of the home buying process is coming up with enough money for a down payment. That’s where using gift money can help make your dream home a reality.
However, when you use gift money for your down payment, you’ll need to be aware of some complexities that differ from when you are using your own money. Your potential home mortgage lender doesn’t know your benefactors, so you’ll need to do some extra legwork to prove that the money is yours to use.
Why Do Lenders Need To Verify Gift Money?
When you apply for a home mortgage, you provide your financial information to your lender so that they can verify your ability to make ongoing payments. Your credit score, income, and assets will show lenders that you can afford your mortgage, but they will be wary of any large deposits in your account that don’t come from these sources. Essentially, when you are using gift money for your down payment, your lender’s biggest concern is that you are using a loan to secure another loan – your mortgage – which can potentially mean big problems for both of you in the future. For this reason, lenders will also typically restrict gift money to family members.
How Lenders Will Verify Gift Money
To prove that the money in your account is a gift and not from another loan, you’ll need to provide your lender with verification. The main process of doing so is having the gift giver write a letter to your lender stating that the money is indeed a gift and not a loan.
Typically you’ll need to have the donor’s information, their relationship to you, how much money the gift is, when the gift was given, and most importantly, that the giver does not expect any repayment. For special loan types like FHA loans, your donor may need to provide additional bank information as well.
Using Gift Money With Different Loan Types
Not all home mortgages are the same, so you’ll need to verify how gift money can be used with your loan type.
For conventional loans, you are eligible to use gift money to pay for your entire down payment so long as you can put down 20% or more. For down payments under 20%, your lender may have different requirements for just how much of your payment can come from gift money. You’ll often be asked to make some contribution of your own to secure the loan, and gift money is typically restricted to primary residences or second homes.
As noted above, for government-backed loans like VA and FHA loans, you may need to have additional proof that the gift money is what you say it is, but all of your down payment can be paid using these funds once verified. If you have a less-than-stellar credit score, your lender may also require that a portion of your down payment comes from your own resources. You can only use gift money for these loans for a primary residence.
How To Prepare For Using Gift Money As A Down Payment
Preparation is crucial if you plan on using gift money for your down payment. If a lender sees a large lump sum is deposited into your account the day before you apply for a mortgage, they may not have enough time to verify and confirm that this amount is legitimate. It’s in your best interest to secure a gift letter anytime you receive a large amount of cash so that you can always verify that it was not a loan. Underwriters will be looking at your long-term finances and will flag any significant amount that doesn’t seem to come from your income or assets.
If you’re ready to apply for a loan today, answer a few questions here, and a home lending expert will contact you with available opportunities.