Gift funds are the path to home ownership for many today. They may constitute part or all of the down payment, the closing costs, and/or the financial reserves. In fact, most borrowers purchasing a one to four unit principle residence are allowed to close with no money of their own.
However, there are restrictions and regulations, so plan ahead and follow procedure.
Who may supply the gifts?
- A relative – anyone related to the borrower by blood, marriage, adoption, or legal guardianship.
- A fiancé, fiancée, or domestic partner.
How must gifts be documented?
The gift letter: The donor must write a letter specifying the amount of the gift and stating that no repayment is expected. It must include the donor’s name, address, telephone number, and relationship to the borrower. If the gift has already been given, it must specify the date when the funds were / will be transferred from the donor to the borrower.
Donor bank statements: The fact that the donor does own the gift funds must be verified via a copy of the donor’s bank statement. As with the borrower’s bank statement, the document must be complete, with no white-outs, cross-outs, or notes.
If the funds have been transferred: Along with the donor’s bank statement, the borrower must provide a copy of the check or the wire transfer; a copy of the borrower’s deposit slip; and a copy of his or her updated bank statement showing the date on which the funds were deposited and the new account balance.
If funds will be transferred at settlement: The donor must have previously provided the gift letter and proof of funds as above. At closing, the gift funds must be presented in the form of a certified or cashier’s check.
When the donor will live with the borrower…
Funds provided by a fiancé, fiancée, domestic partner, or relative who has lived with the borrower for the past 12 months and who will also occupy the home being purchased are not considered gift funds. These “gifts” can be pooled with the borrower’s funds and considered as his or her own.
This is an important point to note in cases when some borrower funds are required, according to MN mortgage lenders. For instance, borrowers are required to contribute 5% when the loan to value will be greater than 80% on the purchase of a 2 to 4 unit principal residence.
When donor funds need to be regarded as the borrower’s, the donor must provide a gift letter proclaiming shared residency, plus documentation showing that his or her address is and has been the same as the borrower’s. This could be in the form of bills, bank statements, or a driver’s license.
As with all funds, the donor must show proof of ownership via bank statements.
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