A common source of funds for down payment are gifts from family members or others that are very close to you. These funds are allowable on several loan programs but there are very strict rules that dictate where they can come from, what they can be used for, and how they must be documented. It is critical that the transfer of funds follows these rules or the money will not be allowed as part of the transaction.
First, do nothing!
It is imperative that you contact me as soon as you know you might be using gift funds in your home purchase. Do not accept or deposit any gift money until we have discussed the process and documentation requirements for your mortgage program. Funds used for settlement generally must be documented for several months. If the rules regarding gift funds are not followed, we may have to delay settlement for several months to “season” those funds. It cannot be overstated how important this is.
It must be a gift.
In some case, the donor may need to provide bank statements or other documentation to show they have the funds to provide the gift and that those funds came from their own account. Neither a formal or informal agreement to pay the money back is acceptable; the funds must be a gift. In fact, both you and the donor will be required to sign a gift letter that clearly states the funds are not to be repaid.
Every step must be documented.
Every step of the transfer of funds must be documented so cash is not advisable. It is preferable that the exchange occur by check or wire transfer. Ultimately, the underwriter is going to need to see evidence of the funds coming from the donor as well as a deposit slip showing the funds being deposited into your account.
As stated above, if you think you may be using gift funds, contact me right away so we can discuss the implications for your loan program and go step-by-step through the process for transferring the funds from the donor to you.