While a few lenders still require borrowers to come up with at least 5 percent of their down payment, most allow you to use gift money from a donor to pay your entire down payment and/or closing costs.
However, no lender will allow you to use gift funds without proper documentation.
But what is “proper” documentation?
Well, you’ll always need a gift letter signed and executed by the borrower and the donor or donors. The donor may also need to provide bank statements, though that depends on the loan program and when and how the donated funds are transferred.
I’ve found that often times the donor doesn’t want to provide this information and this causes problems with the mortgage application. But with a little communication and preparation, you can easily avoid those problems.
That’s why, in this post, I’ll review gift documentation guidelines for the main loan programs. By understanding these guidelines, you’ll also learn how to minimize the documentation required which may be seen as intrusive by the donor. As a result, you’ll avoid costly, last-minute delays in the mortgage application process.
Down Payment Gift Guidelines for Conventional Mortgages
The amount of documentation you need for a gift on a conventional loan depends on how, when, and to whom the donated funds are transferred.
If your donor transfers the funds directly to the escrow agent, the donor will not need to provide a bank statement. You will, however, need a completed and executed gift letter as well as the wire confirmation receipt from the escrow agent.
It’s critical that the account number on the wire transfer confirmation matches the account number listed on the gift letter. If those two numbers don’t match, you’re going to run into issues.
If your donor transfers the funds to the borrower and those funds appear on the most recent two months of the borrower’s bank statements, the donor will need to provide a full bank statement.
This is because, for any large deposit made within the past two months, lenders require documentation to verify the source of funds.
Down Payment Gift Guidelines for FHA, VA and Jumbo Mortgages
If you’re applying for an FHA, VA, or Jumbo mortgage, you will need to provide a bank statement from the donor regardless of when, how, and to whom the gift is transferred.
So even if the funds from a donor have been in the borrower’s account for two months or the donor transferred the funds directly to the escrow agent, you’ll still need to provide the lender with the donor’s bank statement.
Be Proactive and Discuss Documentation Requirements With the Donor
Understanding and discussing documentation requirements with your donor in advance so they know what’s going to be required of them is yet another reason I often write about the benefits of being a proactive buyer.
If, for example, you’re applying for a conventional mortgage and your donor doesn’t want to provide a bank statement, you can get ahead of it by ensuring those funds are deposited early. As mentioned, with a conventional mortgage, so long as your donor’s funds don’t appear on your two most recent bank statements, the donor won’t need to provide a bank statement of their own.
Similarly, when you know that your desired loan program is going to require a bank statement from your donor, you can have that discussion with them early and prepare accordingly. Otherwise, you could end up scrambling at the last minute and that rarely leads to an ideal outcome.