In some of our prior blog posts, we discussed down payment requirements and down payment assistance programs. Perhaps the most popular form of down payment assistance comes in the form of a cash gift from a family member!
Cash gifts are allowed as down payments for FHA, VA and Conventional mortgages. However, in order for the cash gift to be acceptable to the mortgage lender, specific documentation and handling of the funds is required.
Before you accept the cash gift, ask your lender for the handling guidelines that will apply to your mortgage.Each type of mortgage may have different documentation rules, and even one step out of order could cause the lender to disallow the funds.
It’s important to note that the gift-giver must be willing to be involved in the documentation process! They cannot remain anonymous, nor avoid providing proof of the distribution of the funds.
For example, here are general guidelines from The Mortgage Reports and the Chicago Tribune:
1. The person giving you the cash gift must provide a letter with the following details:
- Who the gift is for (the grantor must list your full name as the recipient)
- Their relationship to you
- The amount of the cash gift
- The property address you are purchasing with the cash gift
- A statement saying this is a gift, not a loan, and no repayment is expected
- Signature, name and address of the giver
2. The giver must prove these funds came out of their own account, by providing:
- Bank statement showing proof of funds in the giver’s account, before gift is given
- If a personal check is issued for the gift, copy of the cleared check will be required
- If using a cashier’s check or wire transfer, record of the transaction will be required
- Another bank statement showing the giver’s account after the gift was issued
3. Open a new bank account with the gift funds you’ve received. Do not mix money around. Deposit exactly the amount of the gift.
4. Leave this new account untouched. Keep all monthly bank statements.
5. If the person issuing the gift is giving you more than $14,000, a “gift tax” may apply. Usually, the person issuing the gift is responsible for any taxes. Consult with your tax preparer, or visit IRS.gov for details.
Using a cash gift for your down payment requires going through some red tape, but if you obtain your lender’s instructions in advance of accepting the gift, the mortgage underwriting process will be smooth!