Gift money becoming more and more popular, especially among millennials. Even if they have a good income, because of large student loan amounts, it can be difficult for them to save for a down payment. That’s why gift money is often used as a closing cost solution.
Often, only thanks to gift money, first-time homebuyers can afford to purchase a property.
If you’re considering gift money as the option, there are three essential points to keep in mind:
- It must be from a Relative who is connected to you by blood or marriage.
- It must be accompanied by a Gift Letter (see below for more information on Gift Letter requirements).
- If you get it within 60 days of applying for a mortgage, it must be sourced and seasoned (what these two means you’ll find below as well).
Gift Letter: What Should Be Mentioned In It
So, you’re getting gift money. However, for a smooth process, it should be backed by a letter including all of the information listed below:
- The total amount gifted
- Giver’s name, along with the signature
- Phone number with the address
- Relations to the borrower
- The borrower must be named, and his/her signature must be provided as well.
- The letter must declare that there is no need for repayment, plus include the language asserting that the funds were not provided to the donor by any person or entity with interest in the property’s sale.
The Transfer of Gift Funds. Meaning of Sourced and Seasoned
Sourced indicates that you should prove that the person who gave the money actually had them on hand.
Seasoned suggests that you or the donor should have owned the money for more than 60 days – the deposit cannot appear on the most recent two bank statements because it will create some questions and need additional documentation.
In simple words, the individual who gave you the funds must provide bank statements demonstrating that they had the funds available to give as a gift. Not a surprise that this can be not-so-pleasant, to say the least, for the one who was so nice as to try to help you.
If your parents or a relative handed you funds for the purchase of a property over than 60 days ago (transfer does not appear on the past two months’ bank statements), the lender would not consider this money to be a “gift” for the purposes of buying this home.
It frequently causes misunderstanding and hesitation on the side of the gift donor to present the appropriate documents, and it may be an uncomfortable scenario to find oneself in.
We hope that you’re reading this before it’s too late!
If your relative intends to give you the money at the end of escrow, there are two ways to go about it – an easy and a hard one.
Keep in mind: At the time of closing, all gift money must be transferred into Escrow. This is perhaps the most straightforward method.
Let’s say that the money is transferred into your account and appears in your bank statements for the two months before the purchase- you’re looking at a rather invasive production of bank statements and paper trail documents from both you and the relative giving the gift.
The most efficient approach to receiving gift monies is to wire funds from the gift giver to the Escrow company. Gift funds are frequently restricted in terms of the amount that may be used toward your down payment, but they are generally not limited when applied to closing costs for the purchase.
The person making the gift also should be aware of the potential tax consequences of giving gift monies.
Closing Costs Options
Whether you can get gift money to aid with the closing costs, consider using these funds either to pay the Upfront Mortgage Insurance Premium (for FHA loans) or you can buy down the interest rate to permanently reduce your mortgage payments and save a fortune in interest over the life of the loan.
When you have the option to pay higher closing costs to decrease the interest rate or to avoid “rolling in” fees into the loan amount, you have the potential to save thousands more than the original cost of paying the cost upfront. Unfortunately, this is a clear fact that some lenders refuse to reveal for fear of scaring you away with more significant closing expenses.
Once you are informed of all of your choices, you will be able to make the right decision about how you want to organize the financing of your new house.