Generating all the funds you need for mortgage down payments and reserve requirements can be difficult. Equaling thousands of dollars, and in some cases tens of thousands, this can be a significant burden for many people. If you are looking at a jumbo loan, the amount is likely even higher than conventional loans.
To qualify for a jumbo loan, many borrowers will use gift funds to support down payment or reserve requirements. While a useful way to qualify for jumbo loans, you need to go through a specific process to get the loan you need. Using gift funds in general is useful, but jumbo loans will have their own unique process…
Why are Gift Funds a Concern?
Lenders like to loan money to people who are financially responsible and stable. One of the indicators of this stability is savings, which can be used for a down payment or cash reserves if required. Someone who has saved for years to generate a down payment is less likely to miss payments or go bankrupt. Quite simply, people with money in the bank are less of a risk to lenders.
But what if the money was given to the borrower?
In this case, the borrower hasn’t displayed the patience, discipline, and responsibility that comes with saving for a down payment. So while lenders allow gift money to be used for a down payment or reserves on a jumbo loan, they are meticulous about verifying the gift’s information.
How to Use Gifts for a Down Payment or Reserves on a Jumbo Loan
The Gift Must Be From a Family Member
Before you can use a gift for a down payment, it will have to come from a family member. Unfortunately for many borrowers, most loans (jumbo or otherwise), won’t allow just any donor to give a gift fund, and this is a fundamental requirement. Some loans, such as certain options through the FHA, do allow for friends to make the donation, but this is not the case with the jumbo-loan program that we are offering.
Family members can include parents, siblings, and children. Talk with a knowledgable lending expert to see if your family member qualifies.
Have a Detailed Gift Letter
If the gift does in fact come from a family member, the next step will be to create a gift letter. This is basically a thorough explanation of the loan, in writing, that lenders use to verify all the necessary information.
The gift letter should include:
- Donor’s Information: The basic information about the donor will need to be included. This should include the donor’s name, as well as their contact information, including address, phone number, email, and any other important information for contacting the donor.
- Relationship to Borrower: Another piece of information that you will need to include is the relationship between you and the gift donor. Basically, the lender will need to know if the donor is your father, mother, grandparent, sibling, aunt, uncle, or any other type of relation.
- Total Amount of the Gift Fund: The lender will also need to know exactly how much money the donor will be giving. This should also include whether or not the entirety of the gift will be used for the down payment or reserves, or if only a portion will be used towards loan qualification.
- A Statement that the Fund is Not a Gift: This might be the most important part of the entire gift letter. The lender needs to know that the money being given to the borrower is not a loan, but is in fact a gift that won’t need to be repaid. It should be clear that there will be no payments, as this would add to the borrowers debt load and impact their ability to repay the loan.
- Address of Property Being Purchased: Finally, the gift letter needs to include the address of the property that will be purchased with the loan, assuming approval.
Bring Documentation of the Gift Itself
When compiling information on the gift, you will need to include documentation of the gift, especially your receipt of the money. The lender will likely ask to see a bank statement showing a deposit of the gift money, but if the money has not yet been deposited, they could request proof that the donor does in fact have the money to give. A copy of a cancelled check made out to the borrower, or paperwork that shows an electronic transfer can also be used to verify the funds.
The process may be complicated if the gift comes in the form of non-liquid assets, such as stocks or other investments. In this case, the lender will likely request a statement from the brokerage account showing a transfer of the money.
There’s another important aspect to remember: the gift money must be placed in a stand-alone bank account, separate from your checking or savings. This is to reduce the chances that the money gets accidentally spent. Don’t let your gift money and personal savings mix, as it could create a complex paper trail, possibly causing the lender to reject your use of gift money on a jumbo loan.
Gift Funds and Tax Implications
Generally speaking, the person receiving the gift will not have any tax implications related to the transfer. This is true regardless of the gift amount. However, the kind-hearted person giving the gift may have to pay a gift tax.
According the the IRS’s website “any gift is a taxable gift,” but there are many exclusions, including gifts that are less than the annual exclusion amount. Basically, if the gift is $15,000 or less, it won’t trigger a gift tax. Again, if you are receiving a gift, taxes won’t be a concern, but you should be aware of the potential tax implications if you are giving a gift. Be sure to discuss the tax issues with someone who is giving a gift to you so they are aware of any upcoming taxes.
Note: San Diego Purchase Loans is NOT a tax advisory service. Always seek professional advice before making any tax-related decisions.
Apply for a Jumbo Loan for Your Next Purchase
If you are using a financial gift as your down payment or reserves on a jumbo loan or conventional loan, let San Diego Purchase Loans help with your application. We take a common-sense approach to mortgage underwriting, increasing your chances of loan approval!