USDA Gift Funds Guidelines

A present box with gift money inside wrapped with a red ribbonNavigating the intricacies of mortgage financing, especially in USDA loans, requires a clear understanding of gift guidelines and funds. The USDA gift guidelines outline the rules and requirements for utilizing gift funds, providing valuable insights into the intricacies of financing a home purchase.

These guidelines explain how to use gift funds for various aspects of the homebuying journey, from earnest money to closing costs.

Whether you are exploring options for gift money usage or delving into the documentation requirements, a comprehensive grasp of USDA gift rules ensures a smoother path toward homeownership.

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USDA Loan Overview

USDA home loans, which are government-backed mortgages. They offer these key features:

  • 100% financing, no down payment required
  • Limited income eligibility requirements 
  • Available for rural properties only
  • Slightly higher interest rates than conventional loans

The zero-down aspect makes USDA loans appealing. But you still have to pay closing costs, which gifts can help cover.

Is a Down Payment Needed for a USDA Mortgage?

USDA loans offer 100% financing, eliminating the need for a down payment when buying a home. However, buyers are still responsible for covering closing costs, typically 2–5% of the loan amount.

Homebuyers can utilize gift funds to benefit from the no-down-payment feature of USDA mortgages, eliminating the need to save up for closing costs. These gift funds essentially serve as the down payment, covering the upfront expenses associated with the loan.

What Gift Fund Documentation is Required?

To use gift funds with a USDA home loan, you must provide proper documentation that the money is truly a gift and not a loan. Here are the typical documents that are required:

  • Gift letter: a signed statement from the gift giver confirming they do not expect repayment. Must include name, amount of gift, and relationship.
  • Proof of transfer: Documentation showing the gift money transferred to your accounts verifies that you have received the funds. 
  • Bank statements: account statements showing the deposit of the gift money. It must match the gift letter amount.

Providing this paperwork allows the USDA lender to validate that the gift is acceptable and meets program guidelines.

Can Gift Funds Pay Closing Costs on a USDA Loan?

Yes, gift funds can be used to pay various closing costs on a USDA mortgage.

  • Despite 100% financing, gifts can serve as your down payment.
  • Loan origination and underwriting fees 
  • Appraisal and inspection fees
  • Taxes and insurance escrows
  • Loan discount points (if applicable)

Gifts enable you to meet these expenses without having to make direct payments. Your account receives the funds directly for use at closing.

What Are the Requirements for USDA Gift Funds?

While allowed, USDA loans place a few restrictions on gift funds to prevent fraud and ensure program integrity:

  • The gift giver must be a relative, employer, charitable organization, or government agency.
  • The gift letter must confirm that no repayment is expected or required.
  • Gift funds must be documented and transferred before closing.
  • The borrower must contribute a nominal amount of their cash at closing. 

If you meet these requirements, a gift can provide part or all of your USDA mortgage down payment.

Pitfalls to Avoid With USDA Gift Funds

When going the gift fund route, there are a few potential missteps to avoid with your USDA loan:

  • Having the gift giver co-sign or take ownership of the property
  • Accepting undisclosed loans or debts tied to the gift
  • Unable to document or track the gift money
  • Using gift funds that have not been seasoned in your account for at least two months

Any indication that the gift funds aren't entirely yours with no strings attached could make your loan ineligible. Work closely with your USDA lender to ensure you meet all requirements.

The Benefits of Using Gift Funds With a USDA Mortgage Are Significant

Taking advantage of gift funds provides several advantages when getting a USDA home loan:

  • It allows you to afford closing costs on a zero-down mortgage.
  • It helps you purchase sooner without saving up cash.
  • This may enable you to buy a more expensive home.
  • Reduces the loan amount borrowed compared to financing by 100%.
  • It makes homeownership attainable if a down payment is an obstacle.

In many cases, a thoughtful gift from relatives or others can finally help you achieve your dream of owning a home.

If Gift Funds Aren't an Option, What Are the Alternatives?

If gift funds aren't possible for your situation, two alternatives to covering the USDA down payment and closing costs include:

  • Lender credits: The lender agrees to cover closing costs by providing a credit at closing. You finance these costs with the loan amount.
  • Seller contributions: As part of the purchase offer, the seller agrees to pay a portion of closing costs, which reduces your out-of-pocket expenses. 

These options prevent an outright gift but still ease the burden of your upfront costs on a USDA mortgage.

Buying a Home With the Help of Gift Funds

Utilizing gift funds for both your USDA loan down payment and closing costs can effectively eliminate a significant obstacle to achieving homeownership. If you lack liquid assets, receiving a financial gift from family members or other sources can offer a straightforward and impactful solution.

Documenting the gift properly is crucial as it ensures precise tracking of the funds and demonstrates no expectation of repayment. By meeting these requirements, you can satisfy the criteria set by your USDA lender. With the assistance of generous contributors, realizing the dream of owning your own home becomes attainable, even with limited savings.

Summary Tips

If you plan to use gift funds for a USDA mortgage, keep these essential tips in mind:

  • Have the giver provide a signed gift letter and proof of fund transfer.
  • Ensure the gift has no strings attached; it cannot be a loan.
  • Deposit the money and document a 2-month season in your accounts.
  • Use for down payment or closing costs, but not both.
  • Contribute some of your funds at closing. 
  • Get guidance from your USDA lender throughout the process.

USDA guidelines allow you to leverage gift money to purchase your first home. With proper documentation, gifts provide a simple way to overcome the financial hurdle of down payments and upfront costs.

SOURCE: Chapter 9: Income Analysis