Wednesday, November 6, 2013

Gift Money for the Down Payment and Closing Costs

Can someone other than a borrower pay for the borrower's down payment and closing costs?

If a borrower does not have enough money to pay for the required down payment and closing costs by themselves, it is permissible to have a relative give the borrower the money as a gift.

Here are the rules:

With an FHA or VA loan, the entire down payment and money for closing costs can come from a relative.  The gift donor must sign a letter stating that the funds do not have to be paid back.  The donor must be able to show that they are able to provide the funds (a bank statement showing the money came from their account is sufficient), and the borrower must show receipt of the funds by providing a bank statement.

With a conventional loan, the rules are slightly different.  A relative can give a gift to the borrower for the down payment and closing costs, but the borrower must contribute the minimum required down payment themselves (usually 5%).  The exception to this is when the gift is for at least 20% of the purchase price. Then, the relative can give the borrower the entire down payment and closing costs and the borrower doesn't have to contribute any money at all.  Again, the donor needs to sign a gift letter stating that the money does not need to be paid back, and a paper trail showing the money coming from the donor's account into the borrower's account must be provided.

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