Saving for a down payment? Learn all about gift funds!

Remember when you were a kid and — on your birthday, holiday or some other occasion — your parents, aunts and uncles gave you the best gifts you could ever imagine? Maybe a new bike or a train set or Barbie Dreamhouse Dollhouse — the one with the pool, slide and elevator? OK, so you didn't get the cliched pony, but perhaps you were surprised with a puppy or a kitten?

Family members always give the best gifts.

That doesn't need to stop now that you're an adult. Family members can still come up with the best gift of all: helping you with one of the biggest purchases you'll make in your lifetime – a new home.

What are gift funds?

Saving up for the closing costs or the down payment is often one of the biggest hurdles to homeownership, especially for first-time homebuyers. But it doesn't have to be that way. It's not widely known and rarely discussed that “gift funds” can help with your down payment.

Gift funds are simply contributions received by the prospective homebuyer from other parties, such as family members, for a down payment or to help cover closing costs. They're called gifts because there is no expectation of repayment by the recipient.

If you had to pay it back, it wouldn't be a gift, now, would it?

Do I need to document a money gift?

When using gift funds, there's mandatory documentation required to ensure the funds meet the approved criteria. Sounds official, and yeah, it is. But your lender will ensure your gift funds adhere to the legal requirements.

Anyone gifting you the funds for this purpose will need to transfer the amount to your bank account. Once verified in your checking or savings account, print out the statement as proof of deposit. Next, you'll want to get a copy of the gift-giver's bank statement. This will show evidence of the withdrawal from their account. Together, these two statements will document the transfer.

If an electronic fund transfer can't be verified, you'll need a certified check, cashier's check, money order or official proof of wire transfer to show the account withdrawal.

Also, the person gifting the funds must provide a “gift letter.” This is the documentation verifying that the funds were given to you with no strings attached, i.e., you don't need to pay it back. 

Finally, since some programs require proof of donor ability, the gift giver may be required to prove that they are financially fit enough to gift you the funds. 

Which loans are the best for gift-fund usage?

Conventional home loans and Federal Housing Administration mortgages (FHA loans) tend to be good mortgage vehicles for utilizing gift funds. This is because they are not typically loan programs that offer 100% financing. Every mortgage product has different parameters, but some are more lenient than others, so you should ask your lender to guide you to the right loan product for your needs.

Who can gift you the funds?

For Conventional loans, generally acceptable gift donors include your family members by blood, marriage, adoption or legal guardianship. This can consist of parents, grandparents, siblings, spouses, domestic partners and fiancés.

But FHA loans also allow gift funds to come from a close friend or another person — like an ex-step parent — with a clearly defined and documented long-standing or personal relationship with you. With FHA loans, you can also receive gift funds from your employer, labor unions or a charitable organization.

If you're a first-time homebuyer or a low or moderate-income family, gift funds can also be received from homeownership assistance programs run by government agencies or public entities. 

Are there stipulations?

There are a few rules to be aware of. First and foremost, gift funds can not come in the form of cash. That's because loan underwriters are unable to document that the source of the funds is actually the gift donor.

But, it is acceptable for the gift giver to borrow the funds they plan to gift you — as long as they're not borrowed from a party involved in the transaction, like the seller, builder, realtor or lender.

If you are related to the seller of the property you're purchasing, one option could be the gift of equity. In this instance, the seller may choose to give a portion of the home's equity to the borrower to reduce how much money the borrower needs to have available for a down payment and closing costs.

For some loan types, the borrower might be required to bring a certain amount of their own funds to the loan in order to qualify (minimum borrower contribution).

Lastly, gifts cannot be used to meet reserve requirements that may apply to the loan. For conventional loans, contributions are allowed for either owner-occupied properties or second homes, but they are not eligible for investment properties.

Getting started with gift funds and down payments

It's important to know what your options are. Buying your home can be a big move, with a large upfront investment. That alone is often why many first-time buyers put off taking the first step to homeownership. 

But there may be even more options for help on your down payment and closing costs than you realize. If family members and assistance programs are able to help out with your down-payment, you could be on your way to owning your own home sooner than you ever thought possible. 

Connect with a local loan officer to see what's needed to utilize gift funds for down payment requirements. And ask about any potential down payment assistance programs you may be eligible for in your state.