Buying a Home With Gift Funds
There are things to know when buying with gift funds!
I often have clients paying the downpayment portion of a property purchase with money they receive from their parents which the lender calls Gift Funds. There are any number of rules the lenders will use when dealing with these types of funds. One of the main rules to think about is that the lender will require documentation clearly showing where the monies actually came from; no one wants to find themselves involved in money laundering. Keep in mind this post is just to give you a sense of what to think about when using gift funds. Speaking to a tax advisor is very important when buying a home with gift funds.
When will the gift funds be placed in the purchaser’s bank account?
If the gift funds are placed in the purchaser’s bank account before escrow opens and they have been “seasoned” for a few months many lenders won’t question where the money came from. “Seasoned” simply means the gift funds have been in the borrower’s bank account for more than few months. Usually a lender will want two months of bank statements for each of the borrower’s bank accounts which means if the funds were in the account for more than two months there may be no issue.
If the gift funds are to be given to the purchaser after escrow has been opened and there isn’t time for the funds to be seasoned red flags may go up for the lender. If the gift funds are to be given after escrow has opened many mortgage brokers suggest having the parents wire the funds directly into the escrow account. This can often make the process run much more smoothly.
When buying a home with gift funds can the funds be used for closing costs?
Don’t take it for granted that the gift funds can be used for any and all the costs of purchasing the property. In fact gift funds may not even be allowed to be used for 100% of the down payment. Some lenders will require the borrower to have the money for a small percentage of the total down payment, in some cases 5%.
Some lenders may also require borrowers to have reserves in the bank, and may not allow these reserves to come through gift funds. Reserves are the monies sitting in the borrower’s account that would be sufficient to pay several months of mortgage payments.
An example of how gift funds can effect a purchase.
Let’s take a quick look at the numbers just to see how this can play out.
A borrower is purchasing a home for $1,000,000 with a 20% downpayment coming from the parents.
Purchase Price: $1,000,000
Down payment: $200,000
Closing Costs: $10,000 (very rough number)
Reserves (6 months): $24,318 (at 4.5% interest rate)
In this scenario the buyer may need almost $35,000 of their own money in order to qualify for lending.
The important thing to remember is purchasing a home is not easy, and adding a loan to the mix can create obstacles that are difficult to foresee.
Give me a call if you would like to discuss your scenario.