Gift funds can be a powerful tool for homebuyers who need a little extra financial support to make their homeownership dreams come true. These funds, typically provided by family members or close friends, can be used toward the down payment or closing costs on a mortgage. This can significantly ease the financial burden on buyers, allowing them to purchase a home sooner than they might have been able to otherwise. For many first-time homebuyers, gift funds make it possible to retain some reserve savings for incidentals that could otherwise be devastating financially.

A major benefit of using gift funds for a mortgage is the ability to reduce the loan amount and, consequently, the monthly mortgage payments. By increasing the down payment supplemented by gift funds, buyers can lower their loan-to-value (LTV) ratio, which may also help secure more favorable interest rates and loan terms. This can result in significant savings over the life of the loan. The loan officer should be able to educate their borrowers about the lending guidelines as it pertains to the use of gift funds. Lenders typically require a detailed gift letter from the donor stating that the money is a gift and not a loan that must be repaid. The gift letter often includes the donor’s name, address, relationship to the borrower, and the amount of the gift, however, it will be important to obtain what is required in the letter from the lender early in the process.

While gift funds can provide critical assistance, borrowers should be mindful of the potential tax implications for the donor. The IRS allows individuals to gift a certain amount per year without incurring a gift tax, but if the amount exceeds this limit, the donor may need to file a gift tax return. Both the donor and the recipient should consult with a tax professional to fully understand the financial implications. Overall, gift funds can be an excellent way to support homebuyers in achieving their goal of homeownership, providing the necessary boost to overcome financial hurdles while ensuring that all parties are well-informed and compliant with relevant regulations.

If you are fortunate enough to be gifted financial assistance towards your down payment, it is advised to consult your loan officer so you know all of the requirements as they relate to these funds. It would also be prudent to get the gift letter at the same time to minimize potential delays in the lending process.

Related Reading:

Do I Need a 20% Down Payment for a Jumbo Loan?
The Top 5 Things To Consider Before Shopping For A Home.
Top 5 Ways To Effectively Save For Your Dream Home.

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