Mortgage 101
December 12, 2022

What are Gift Funds and How are They Used When Buying a Home?

Estimated reading time: 2.5 minutes

Buying a house can be one of the largest purchases a person makes in a lifetime. There are a lot of costs, including proof that you can make your monthly mortgage payments. Sometimes, a homebuyer is lucky enough to receive assistance from loved ones for their mortgage costs in the form of gift funds.

What are Gift Funds?

Gift funds are a personal monetary gift given to a borrower to help cover a down payment, closing costs, or financial reserves. Gift funds must be thoroughly documented and meet certain requirements to ensure a borrower will still be able to afford their monthly mortgage payments and not default on their loan.

How Are Gift Funds Documented?

A letter of documentation, also called a gift letter, is required for gift funds.

A gift letter must:

  • Specify the dollar amount of the gift
  • Specify the date the funds were transferred
  • Include the gift donor’s statement that no repayment is expected
  • Include the donor’s name, address, phone number, and relationship to the borrower receiving the gift funds

In addition, documenting the transfer of gift funds is required for mortgage lenders to verify during processing and underwriting.

  • A copy of the donor’s check or bank withdrawal slip as well as the homebuyer’s bank deposit slip
  • Settlement statement showing a receipt of the donor’s gift
  • Certified check copy
  • Proof of wire transfer

Why Do You Need Gift Fund Documentation?

Documentation is required to make sure the money isn’t a loan, which can negatively affect your debt-to-income ratio and may affect if you qualify for a loan. A gift letter and paper trail are confirmation for your mortgage lender that you have the funds for your monthly mortgage payments.

Who Can Provide Gift Funds?

Gift funds are only acceptable from certain relations to the borrower. The list of eligible donors also depends on the type of loan you choose.

For example, conventional loan gift funds can only be provided by family members or spouses. In contrast, FHA loan gift funds can be provided by a family member, spouse, close friend, or employer. To learn more about eligible gift fund donors, it’s best to ask your Loan Originator.

Achievable Homeownership

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If you want to learn more about how Homestead Funding can help you achieve the goal of homeownership, contact us today! One of our Licensed Loan Originators will answer any questions you have and guide you through the full process.

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