How to Use Gift Money for Your Down Payment
By Justin McHood
The good news is yes, you can get a gift from your parents to buy a house, but the way you actually get the gift is very important. Mom and dad can’t just leave money under your pillow like the Tooth Fairy.
The process of accepting a gift for your down payment isn’t complicated, and by following these simple rules you can be sure the underwriter reviewing your file will approve.
Write a gift letter
If someone is going to be giving you money to help you buy a house, you’ll first need a gift letter. The gift letter needs to be short, sweet and hand-signed by you and the person giving the gift. It needs to contain the following:
- The relationship between the homebuyer and the person giving the gift.
- The amount of the gift.
- The address of the home being bought.
- A statement that the money is a gift and not a loan that must be paid back.
Establish a paper trail
Next you’ll need to create a paper trail. This is important because underwriters will look for where the money came from and where it went. In simple terms, they will look for proof that the money came from your parents’ account and went into yours.
Each situation will be slightly different, but be ready to provide paper proof of your parents’ account having money in it, money coming out of that account, a deposit into your account and proof your account now has the money in it. Accuracy matters when creating this paper trail, so make sure each transaction is for the exact amount of the gift.
Write a gift letter and use this shortcut
Creating a paper trail correctly has proven to have its fair share of hassles. Getting copies of transactions is time-consuming, and underwriters seem to question every little thing in the process (“where exactly did the $10,000 transfer that I see coming into mom and dad’s account come from?”).
The good news is that there’s a shortcut when it comes to gift letters — one that makes the entire process easier.
Simply add one sentence to the letter that says: “Will wire the gift directly to escrow at time of closing.”
If you add this line to your gift letter, you can avoid all of the paper chasing that most underwriters will require. A day or two before closing, you can get wiring instructions from your escrow agent for mom and dad to wire the exact amount of the gift directly to the escrow company working on your transaction.
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