Using gift money for a mortgage down payment is more common than you may think, especially for first-time home buyers. This is an idea situation for someone who can afford the monthly payment but who may not yet have the required money for the down payment or closing costs. However, when it comes to details of using a down payment gift, buyers really need to pay attention. Regardless of the type of home loan that you have, there are three steps that you must take to ensure that your gift will be correctly applied to your loan. Failure to comply with any step may result in your loan being denied by your lender, a harsh price to pay for mistakes. So focus on your paper trail and follow these specific steps as directed.
Step One. Do not run down to the bank and deposit your check in your bank account. Officially “accept” your down payment gift by detailing the following information in a letter that your lender provides.
- The total gift amount
- The property address that is the subject of the loan
- The relationship of the gifter to the giftee
- State clearly that the money is actually a gift and not a loan that needs to be repaid
Remember, every step of this process needs to be properly documented both from the gift giver to the recipient. So there’s no need to include any additional information in the letter that is outside the scope of the list above. In fact, doing so will complicate things for your lender unnecessarily.
Step 2: Documentation is very important for both sides of the transaction.
For the person who is giving this gift, it is important that you keep a well-documented paper trail of each step in this transaction, including where your gift funds are coming from. If you are selling stock to yield proceeds that will be used as a down payment gift to another, take care to document the sale of your stock and the transfer of the funds from your brokerage account. If you are taking the funds from your personal account, the bank will be interested in receiving a copy of the full bank statement prior to the gift transfer, a copy of the check and then an updated statement after the transfer has been made.
Now you’re ready to write the gift check to the home buyer, making sure that it’s exactly the amount you specified in your letter. Make several copies of the check itself, one for yourself and one for the buyer, which the lender will need in the process.
Step 3: Document Receipt Of The Down Payment Gift
On the recipient’s side, it’s recommended that the buyer walk the check into the bank in person and not to deposit via ATM or online app. Keep in mind that the easier you make things for your lender in terms of paperwork, the faster things can move along with regards to your loan. This may seem simplistic, but don’t forget to collect a receipt for your deposit.
You want to keep this transaction all about the gift check, so that the amount on the deposit receipt is an exact match to that of your check. You will also need a copy of the cleared check from the gifter, which will show the money coming from the bank, in addition to an updated bank statement from the recipient that reflects the new deposit amount.
It may seem like a lot of paperwork, but ultimately it is worth every step when your mortgage application gets approved!