USDA gift funds: What you need to know before buying a home!

Gift money can pay your closing cost!

Gift money in a gift boxThe USDA offers a few guidelines for home buyers when obtaining gift funds. First, applicants must have a good credit score (640) and be able to provide documentation of their income. Second, the applicant must be able to demonstrate that the purchase is for their own use and not for selling or using the home as collateral.

USDA home loans do not require a down payment. That's right, zero down with 100% financing, but there are still closing costs that need to be paid. Closing costs include title insurance, title search, transfer taxes, and other costs to protect you and lender.

USDA Rural Housing Service provides loans and payment subsidy for low-income Americans to purchase rural and homes located in eligible areas. See Direct loan

To be eligible for the USDA Rural Housing Service loan, the applicant must either be an American citizen or permanent resident. They must also live or plan to live at the property that will be purchased through the grant or loan. It is also necessary that the applicant agrees to reside in the house for at least one (1) year following its purchase.

What is Gift Money?

Let's first look at what gift funds are. Gift funds are any monies that you receive from someone close to you, a relative, friend or an employer for the purchase of your house. You receive the funds from the donor to pay the entire cost or at least a portion of it.

Satisfactory sources of gift money include the following:

  • Charitable organization
  • Labor union or employer
  • Family members
  • Homeownership Assistance Programs and Grants
  • Close friends may also be acceptable, depending on the lender.

What are the best ways to receive gift funds?

Parents signing a gift letter for sonThe USDA permits the receipt of gift money from a qualified donor(s) for closing costs and escrow if applicable, provided that the gift money transfer is properly documented.

With a recalcitrant donor, laying out a road map from donor to borrower can be torturous. The reason for detailed paperwork is to ensure that the gift money is not borrowed.

Gift money must be properly sourced:

To receive funds from the USDA or their lenders, there is a process that must be followed.

Donors who give gifts must provide a gift letter (provided by the lender). The gift letter to the borrower states that the money is not required to be returned/borrowed. The donor must also provide bank statement(s) to show he or she had enough money when the gift money was transferred into his or her savings or checking account.

A gift letter from a donor who provides money directly to a settlement firm requires the lender to verify that the money is not owing and that it was received by the settlement company.

Although a friend, relative or employer may offer you financial assistance, they cannot just give you a check.

Before you deposit the check in your bank account, make a duplicate of it.

You will need to deposit the check into the account you use for the withdrawal of funds.

A copy of your deposit ticket should be kept for the lender.

A copy of your bank statement should be provided that shows the amount you have deposited.

How important is the gift letter?

The donor should also send a gift letter in addition to all the other steps. The letter serves as a declaration to the lender that the donor has received the following information:

  • Date of gift
  • The gift amount
  • Why the gift?
  • Address of where the funds will be used
  • It is important to note that these funds do not constitute a loan.
  • To complete the letter, the donor must sign it and date it.

Maintaining a record of donor contributions

The lender must still verify that the funds were originated from the donor, even if the gift letter was signed by the donor. The lender must verify that the donor did not borrow funds. Borrowers can hide their loan by asking a “donor” to take out the loan and give them the money.

The following documents can be used to prove the origination of funds:

To prove ownership, provide the last two months of bank statements.

Documentation proving the sale of an asset, such as a boat or car

Provide investment statements to accounts where they withdraw funds.


Steps to transfer money from donor to home buyer:

  1. The donor gives you the gift money in the form of a check. A cashier’s check is best.
  2. Make a copy of the check before you deposit it in your bank account.
  3. Deposit the check in the bank account that you’ll use to withdraw funds for closing.
  4. Keep a copy of the deposit ticket for the lender.
  5. Have a copy of your bank statement showing the deposit for the exact amount of the check.
  6. Don't touch the money!

Cash on hand is not an acceptable source of funds, since cash is difficult to track. Never accept cash as a source of gift money.

Additionally, lenders may have their own requirements for gift money. If in doubt, speak to your loan officer for further information.

What are the benefits of gift funds?

Gift funds can help cover closing costs and prepaid costs such as homeowner's insurance.

There are other ways to cover USDA closing costs

But what if gift money isn't available? What about closing costs? You still have options.

Seller Concession

Ask for assistance from the seller. Sellers concessions can help to borrowers who are struggling with closing costs. This is usually done when the actual home's value and the sale price are equal.

When a home seller agrees to help with the buyer's closing and escrow costs, he or she can pay up to 6% of the home's sale price. Some sellers won't help at all, or they'll only agree to pay a lower percentage of the sale price.

The closing costs can be included in the loan, provided the appraisal exceeds the sales price/market value. The loan amount, including the guarantee fee, you are offered by lenders cannot be higher than that of your home.

Lender Assistance

Many lenders are able to cover all or most of the closing costs through premium pricing. The lender will cover them instead. The lender can increase the interest rate in exchange for no or reduced closing fees.

State and non-profit grants and loans

If you are looking for help with closing costs, or the down payment, gift funds can be a great way to do it. You should follow all rules to be eligible to receive gift funds for the purchase of your home.

SOURCE: Chapter 9: Income Analysis

Conclusion

Gift funds can be a great way for home buyers to get a head start on their home buying process. The guidelines for the program are simple, and the process of applying is easy. If you are interested in purchasing a home, be sure to consider gift funds as a way to help you get into your dream home.