3 Steps to Buying a Home with Cash Gifts
What is a cash "gift" and who can give one?
In mortgage terms, a "gift" is a monetary transaction, usually from one family member to another, without the expectation of being reimbursed or paid back over time.
Some mortgage loans require the gift giver to be a close blood relative, with exceptions given for adoptions, domestic partners, and future spouses if you’re engaged to be married. FHA Loans tend to have fewer restrictions, but it’s important to keep in mind that you may have to prove your relationship to the gift giver. Choose a lender who can help you navigate the process and answer any questions you have.
What to do when you receive a small gift
Perhaps you receive a small amount like $50 or $25 dollars, or even an extra $500 or $1,000, from your generous grandma. If you receive this type of gift from family or non-family members, agree to spend no more than 5% of the amount and bank the rest for your down payment savings and closing costs. Typically, only large gifts need a paper trail to satisfy lenders, so be sure to take full advantage of these small contributions and use them for hitting your goal.
If it’s a larger cash gift, you’ll need to do a bit more legwork in order to use it to buy your dream home. By "large gift" we mean any deposits over 25% of your monthly take home income.
What to do when you receive a large gift
Step 1: Create a gift letter and paper trail
Receiving a cash gift to use on the home may seem simple before buying the actual house, but once you’ve made an offer and it’s been accepted, your finances go under scrutiny during the mortgage underwriting process. Basically, this is the way the bank loaning you the money for the mortgage ensures you’re financially fit and able to repay the large chunk of cash they’re giving to you.
They’ll review your income, bank statements, and tax returns. Since 2008, lenders have been incredibly detailed in the types of transactions they’ll review: they’ll want to verify where all deposits came from and why. If you only make $3,000 a month after taxes, but a large $10,000 gift from "Santa" shows up — you’ll need a paper trail for it and a gift letter that covers all the bases.
The gift letter should include:
- The family member’s (gifter’s) name, address, phone number, and relationship to you
- The dollar amount of the gift
- The date the funds were given/transferred
- A statement from the gifter that the money is a gift and that no repayment is expected
- Signatures from both you and the person giving the gift
You’ll submit the gift letter to your lender when you submit other financial documents, such as your bank and investment account statements.
Step 2: Decide how to best use the gift
You’ll need a gift letter either way, but think about how you want to use the cash gift.
Financially speaking, it may be better to earmark the money for closing costs, rather than factoring it into your down payment and financing. Not only is the transaction cleaner this way (some loans require additional proof), but it ensures you aren’t tempted to use the money to buy a house way outside of your budget.
Step 3: Put in a separate account, or wait until closing
The last thing you want to do is simply take the cash (or check) and deposit it into your personal checking or savings account. Instead, put the money into a separate account. We recommend this for two reasons: a) so you won’t be tempted to spend it and b) when you do need to use the funds, you can create a clear and clean paper trail.
In addition to the gift letter and your own bank records, you’ll also need to provide proof of funds for the gift giver’s finances. Here’s (generally) what you’ll be asked to provide:
- A copy of the check (or copy of Paypal, Venmo, or wire transfer)
- A deposit confirmation (a deposit slip or copy of online transaction)
- A copy of your relative’s withdrawal of the money
- A copy of his/her bank statement showing "proof of funds"
It is sometimes recommended that you add the following line to the gift letter, "Will wire the gift directly to escrow at time of closing." With this statement, the escrow agent can provide wiring instructions for the gifter to directly wire the money to the agents working on the closing transaction for your home. This way, you’ll never have to touch the money and will cut down on the amount of paperwork.
Using a cash gift to save for a home is a smart decision. But since buying a house is a large financial transaction, make sure you properly document the gift to enjoy a smooth home purchase experience.