Nearly 25% of first-time home buyers get cash gifts to help buy a home, according to the National Association of REALTORS®.
Mortgage lenders are fine with this. There’s no restriction on how small or big a cash gift can be. Lender will verify, however, where the money came from; and, will make sure the gift is “legal” and not an act of fraud on either party.
So, when you’re receiving a cash gift for a down payment on a home, follow these steps to keep your lender happy.
1. Have a proper mortgage gift letter
When you’re receiving a cash gift for down payment, your lender will ask for a gift letter, signed by all parties, that include the following information:
- The gift giver’s name, address, and contact information
- The gift recipient’s name and relationship to the donor
- The dollar amount and approximate date of the gift
The lender will also look for language that specifically says the gift is a gift and not a loan. The difference between gifts and loans is that gifts don’t require repayment. Loans do.
All parties must sign the down payment gift letter, or else it’s invalid. Electronic signatures are acceptable.
2. Remind the gift giver to keep a paper trail
Your lender will attempt to use a paper trail to match gift letter terms to the money changing hands. As a home buyer, there are two ways you can make this documentation.
- Make a copy of the canceled paper check, or wire confirmation
- Make a copy of the withdrawal receipt from the giver’s bank
Physical and digital formats are acceptable, so use whichever is easier.
3. Deposit the gift into your account, by itself
Your mortgage lender will verify that your gift deposit receipt matches the amount noted in your gift letter exactly, and also the amount of the giver’s withdrawal receipt.
So, when you deposit your gift into an account, do not commingle it with other monies or other cash – your dollar figures must match to the penny or your lender will reject the cash gift from your down payment.
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A brief explainer video for the popular 100% USDA mortgage.