Mortgage gift funds, or down payment gifts, are increasing in popularity as more and more first-time homebuyers enter the market. But what exactly are mortgage gift funds, and how can you make sure they are used properly? Below, we offer insights you can use as you navigate the world of down payments and mortgage gift funds.
Key insights:
- If you are fortunate enough to have been gifted funds toward your down payment, find out if the chunk of change qualifies as a mortgage gift fund.
- As a gift donor or recipient, learn how to properly document funds before, during and after the down payment is made.
- When in doubt, reach out. Edina Realty experts can guide you through the gift fund process.
What are mortgage gift funds?
When deciding on a down payment amount, it’s usually advantageous to put down as much at closing as possible. So, when first-time homebuyers secure a home mortgage loan, close family and friends may offer to give them the funds needed for the down payment.
These gifts are more serious than Grandma’s annual birthday check, though. If the money given is above a certain amount, it must be closely recorded and tracked throughout the home loan process.
What amount qualifies as a mortgage gift fund?
Well, that depends on the borrower’s finances. Let’s consider a hypothetical bank account for a homebuyer named Jody. Typically, any amount over 25 percent of the borrower’s monthly income must be tracked by a lender when the loan is being approved and processed. If Jody’s monthly income is $5,000, then a gift of more than $1,250 should be recorded and tracked.
Along with gift amounts, lenders also pay attention to bank account history. If Jody usually keeps only a few hundred dollars in her account, and suddenly deposits $1,140 into the account, the lender may ask for an explanation of that deposit, even though it’s less than 25 percent of her monthly income.
How do I record and track the gift funds?
You’ve determined that the amount of money gifted is considered to be a mortgage gift fund. Now, both sides involved — the donor and the recipient — will each complete three tasks to guarantee smooth financial sailing.
Donor to-do list
A donor must complete three important steps to properly document the funds they are gifting.
First, prior to the homebuyer applying for a loan, each donor should create a letter that clearly states the:
- Amount of the down payment gift
- Donor’s name and contact information, including their address
- Donor’s relationship to the homebuyer
- Date the funds were transferred
- Address of the property being purchased
- Donor’s signature
- Donor’s intention to offer the funds as a gift, and that the funds are not expected to be paid back by the homebuyer
It’s important that the gift fund be just that — a gift. Loan eligibility is partially based on the borrower’s debt-to-income ratio. A personal loan counts as debt even if there are no interest terms set, and even if Grandma has promised that Jody can pay it back at her leisure.
Second, the donor should write a personal check. Signing off on an old-fashioned check for the exact amount the donor will gift the recipient is a foolproof way to clearly document the transaction for a lender.
The third and final donor task is to provide a copy of the front and back of the check from their bank account to the buyer’s lender. This can be completed after the check clears.
Recipient responsibilities
The recipient of the gift is also required to do a bit of legwork to track the gift fund. Those receiving the gift will need to follow these three conditions:
First, plan ahead to ensure the funds are deposited at least 10 calendar days prior to the loan’s closing. Keep in mind, the money can be in the account prior to the loan application, but this isn’t a requirement.
The second step is getting the funds deposited. To do so, follow these guidelines:
- Deposit the gift fund into the account that you will use to pay your closing costs and down payment.
- Funds should be deposited in person at a bank branch, not via an ATM or phone app like Venmo.
- Double-check that the amount on the bank deposit slip matches what is on your down payment gift letter.
- Collect and keep a deposit slip for each separate transaction or gift fund.
The third thing a recipient needs to do is verify that the gift funds are in their account, and share that information with their lender. Remember, if the funds fall through, your loan may be at risk — so this is a critical task to complete.
Ready to begin the home buying process?
Whether you have Grandma Ruth’s lottery winnings promised to you or will secure a loan on your own budget, it’s a great time to be a first-time homebuyer. Reach out to the Edina Realty customer care team to find a real estate specialist in your area.
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