(Not when working on your down payment and closing costs!)

Hopefully the vast majority of prospective home buyers know that they do not need a large down payment to purchase a home. There are a variety of low down payment programs including a few 100% financing options. But even with low down payment options many borrowers still need some help. One way to help is through the use of “Gift Funds”.

person handing key to new homeowner

Many borrowers have family members who are willing to help them with their home purchase. The use of gift funds has become very prevalent so let’s talk about the best way to receive a gift.

First of all, gift funds are truly a “gift.” They are not funds given as loans and disguised as a gift. The person giving the gift will need to complete a gift letter which will basically state that the funds are truly a gift and are not to be paid back at any time. Each lender will have their own version of the gift letter or certification to be completed and submitted. Second, the funds will need to be “sourced” through a paper trail that shows the funds coming from the giftor’s account and being deposited into the home buyer’s account.

The best way to document the “trail” of gift funds is by receiving a personal check from the giftor and then depositing that check directly into the bank account that will be used by the buyers in the transaction (savings or checking account). Your lender will need to see a copy of the cancelled gift check along with the account statement showing the full check being deposited. It is best to make this deposit separate of any other funds. For example, if you are receiving a $5,000 gift check, do not put any other checks or cash on the same deposit ticket. You would want a deposit entry of $5,000 only, even if it means making two separate deposits during the same trip to the bank.

Please do all you can to not receive a “cash” gift. The Patriot Act and anti money laundering regulations make it extremely difficult to source and use cash gift funds. These regulations have put strict rules on how lenders document and source assets being used in real estate transactions and are there to ensure that the cash is not the result of any illegal activity.

Lastly, the question of the donor’s gift tax may come into question. The annual gift tax exclusion is $14,000 (which can be given to as many individuals as they would like). However, there is a lifetime estate and gift tax exemption which for 2017 is $5.49 million (yes, million). That is per person, so a couple could possibly gift someone $11.98 million. (We should all be so lucky!!) As always, you should check with your CPA to confirm the use and implications of giving and receiving a gift.

The use of gift funds has helped many home buyers get into a property where they can easily handle the monthly obligations but just need help with the upfront down payment and closing costs.

Happy home buying!

Vincent Aurigemma

VP, Residential Lending

Vince Aruigemma Headshot