What are Gift Funds?

Some of the biggest purchases we make are like a new home. However, if you plan to buy a house for the first time, a down payment can be a barrier initially, although you can afford the monthly mortgage payments. Can there be any solution to help with your down payment? Yes. Gift funds can help get approved in case of financing through a mortgage. Let’s collect some details on gift funds.

What do you mean by “Gift Funds”?

Gift funds are contributions from any party in the family that can be used for a down payment or to cover closing costs or financial reserves subject to the minimum borrower contribution requirements. These funds are called “gifts” as the borrower has no repayment expectations. However, gift funds are disallowed on an investment property.

Who are acceptable Gift Donors?

Gift donors, who are generally acceptable in most loans, include closely related family members by blood or marriage or adoption, or legal guardianship, for example, mother, father, aunt, uncle, grandparent, spouse, fiancés, domestic partners etc. It also includes employers, charitable organizations, government entities, and public entities that assist low-income/ first-time home buyers.

In addition, someone in a long-standing or close relationship, such as an ex-step-parent or a close friend with a clearly defined and documented interest in the borrower, is also acceptable in some cases. However, donor requirements vary from lender to mortgage program.

How do Gift Funds work?

The gift donor may borrow funds to gift to the borrower, as long as they’re not borrowed from an interested party to the transaction, such as the seller, builder, realtor, lender, etc. However, cash is not an acceptable method of giving gift funds as underwriters require to document the source of the funds.

When a borrower is related to the seller of a property, gift options can include gifts of equity. The seller may choose to give a gift of equity to the borrower to reduce the amount of funds the borrower needs for down payment/closing costs.

Gift funds cannot be used to meet reserve requirements applicable to the loan. They are also not eligible for investment properties.

For some loan types, the borrower must bring a certain amount of their funds to the loan to qualify, known as minimum borrower contribution.

What is Gift Letter?

A letter signed by the donor must provide evidence of gifts, called a gift letter. For example, if you use gift funds for a down payment, you’ll need a gift letter. A gift letter ensures that this money is a true gift and not a loan in disguise.

What is required to document Gift Funds?

While using gift funds, documentation is mandatory to ensure that the funds meet the approved criteria. The donor will need to provide asset statements to source the funds’ origins. The mortgage company’s underwriting team may help adequately document the gift funds adhering to the requirements.

A gift letter should specify the amount of the gift, the date of transfer of funds and the donor’s statement that no repayment is expected. In addition, it should indicate the donor’s name, address, telephone number, and relationship with the borrower.

When a gift from a relative or domestic partner is pooled with the borrower’s funds, a certification from the donor requires stating that last 12 months, they have lived together and will continue to do so in the new setup. In addition, documents supporting a history of shared residency of borrower and donor should show the same address.

So, if you want to use gift funds for your home loan, talk to a mortgage loan expert and discuss your loan program options to ensure that you document the gift correctly! Borrowers should also consult a tax adviser regarding the tax implication and deductibility of mortgage interest or property taxes, whichever is applicable.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh