When it comes to down payments, we know you have a lot of questions, so we’re devoting the next couple of posts to ensuring you have the answers! Read on to learn about using gifts or cash toward a down payment on a home.

Can I use gifts towards a down payment on a home?

That depends. Your gift must be trackable. In other words, you can’t just plunk $15,000 in the bank and not show where it came from or how you came to receive it. So, if you’ve just gotten married, and you deposit all the checks and cash you’ve received as wedding gifts with plans to use it to purchase a home, you should learn about the rules, limitations, and general guidelines for using financial gifts ahead of time.

What do I need to know about using wedding gifts for a down payment?

You’ll likely need to show your recent marriage certificate to the underwriter to prove that you received the funds as a result of a recent celebration. Even then, you should know that recently deposited checks will be more acceptable to the underwriter than deposited large sums of cash. That’s because your underwriter will be able to track where those funds came from. Receive a large sum in a single check? Be prepared to show your underwriter a gift letter from the gift giver, in which he or she stipulates that the money is a gift, not a loan that needs to be paid back. The gift giver may be required to include various other statements and information, depending on your underwriter, so be sure to find out what’s required before you ask your generous grandfather to take the time to type something up.

How large does a single gift need to be for an underwriter to require a gift letter?

That depends on the underwriter and the type of loan. For a conventional or VA loan, any gift that amounts to over 50% of your total qualifying monthly income will need a gift letter. For an FHA loan, the threshold lowers to 25%. This isn’t a hard and fast rule though, so be prepared to justify smaller gifts as well. Your underwriter may flag any large deposits that are out of the ordinary and require information regarding where the funds came from.

Why do I need a gift letter to prove that the money is not a loan?

Your lender is about to loan you a huge sum of money, and it wants to ensure you’re not also on the hook for another loan that would affect your debt-to-income ratio. As your lender knows, borrowing too much and becoming overextended is a sure-fire way to end up in over your head—and unable to pay back your mortgage.

Not crazy about asking Aunt Mildred for a gift letter? Simply wait 60 days from the time you deposit the funds into your account. At that point, the money becomes “seasoned” and becomes part of your assets.

How much of a gift can I use toward a down payment?

If a relative or friend is giving you money specifically for you to use towards a down payment, here’s what you need to know.

For a conventional loan, the amount of a gift that you can use toward a down payment depends on what percentage you’re putting down. (Not sure how much to put down? We’ll cover that in our next post!) if you put down 20% or more, all the payment can originate from a gift. If you put down 20% or less, part of it may be gifted, and part must be from your own funds (the contribution you must make from your own funds will vary by the type of loan).

FHA and VA loans allow you to use a gift to cover your entire down payment unless you have a lower credit score (between 580 and 619), in which case you must use your own funds for at least 3.5% of the down payment. As with all lending laws and practices, things change and allowances may vary by the underwriter, so check with your lender to determine what’s allowed and what’s not.

Can I use cash for a down payment?

Again, that depends. Your underwriter wants to ensure that you didn’t launder, steal, or otherwise obtain the money through illegal means. Did you recently win the lottery? If so, putting your winnings in the bank and using them to purchase a home shouldn’t be an issue. You’ll have a record of your recent win, so you’ll be able to prove where the money came from. If a relative wants to give you money, be sure (when possible) that it’s a check, so you can prove where it came from.

If you don’t want to fork over that $1,000 Uncle Joe pinned to your wedding dress and ask him if he could write a check instead, or if you simply made out like a bandit at that garage sale you just held, and you don’t have a way to prove where the money came from, you can still use those funds toward a down payment. But, again, you’ll need to plunk them into your account and not touch them for at least 60 days to let the funds season. Once you’ve gotten past the 60-day mark, you can start house-hunting!

How Can I Find Out How an Underwriter Will Treat My Down-Payment Gift?

Using gifts or cash toward a down payment on a home is absolutely possible if you take the time to understand what’s required for your situation and loan type. Want to know how an underwriter will treat your situation? Contact us at Villa Nova Financing Group. We will take the time to look at your entire financial picture and come up with a plan to help you reach your homeownership goals!

Get answers to your questions

We invite you to speak with one of our commercial or residential mortgage experts about your financial and lifestyle goals. This no-obligation consultation can be held over the phone or in our Warren, NJ, office.

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