Gift funds are money someone gives you toward buying your home, with no expectation of being paid back. Lenders accept gifts for the down payment, the closing costs and the prepaids, as long as the donor is someone the program allows and the money can be traced from their account to yours or to the closing table.
For a lot of first-time buyers, a parent or grandparent's gift is the difference between buying now and renting another two years.
Who can give, by loan program
| Program | Acceptable donors |
|---|---|
| FHA | Family member, employer or labor union, close friend with a documented interest in you, charitable organization, government agency with a homebuyer program |
| Conventional | Relatives by blood, marriage, adoption or guardianship, a domestic partner, a fiancé or fiancée, a former relative, someone with a long-standing family-like or mentoring relationship |
| VA and USDA | Documented gifts from relatives and other acceptable donors toward closing costs and any down payment |
Nobody with a stake in the sale can give a gift. That rules out the seller's agent, your own agent, the builder and the developer.
On a Conventional 2 to 4 unit home with less than 20% down, you put in 5% of your own money before gift funds count. On a single-family Conventional purchase you'll live in, the whole amount can be a gift.
The paper trail lenders need
Every gift needs a signed gift letter stating the amount and that it isn't a loan. Then the lender follows the money. The three usual routes:
- The donor writes a check or wires money into your account, and you keep the donor's withdrawal record plus your bank statement showing the deposit.
- The donor wires the gift straight to the title company or closing attorney before closing.
- The donor gives a cashier's check at closing, with proof it came from the donor's own account.
A gift that sits in your account for months still needs the letter and the transfer record. Cash handed over in an envelope is the hardest gift to use, because nothing shows where it came from.
A gift that closes the gap
A buyer is purchasing a $330,000 home with FHA and 3.5% down, and has $4,000 saved.
- Down payment, 3.5% of $330,000: $11,550
- Estimated closing costs and prepaids: $11,800
- Total needed: $23,350
- Seller credit of 3% ($9,900): brings it to $13,450
- Buyer's own savings: $4,000
- Gift needed from a parent: $13,450 minus $4,000 = $9,450
A $9,450 gift wired to the title company before closing finishes the purchase. If the parent can only give $5,000, the buyer is $4,450 short. Raising the seller credit to the full $11,800 of closing costs and prepaids covers $1,900 of that, since a credit can't go past actual costs. FHA 100% financing, which pays the $11,550 down payment through an assistance second, covers the rest with room to spare.
Getting a gift ready to use
Decide the amount before the offer, so the gift letter and the closing numbers match. Have the donor keep their bank statement from the month the money moves. If the money comes from more than one person, each one signs a separate letter. The question page can family gift me the down payment covers more donor scenarios.
Enter the gift in the cash to close calculator to see what's left for you to bring. To set up the gift the way your lender will want it, call AAA Capital Funding at 888-601-8344.