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Documenting Financial Gifts

When buying and financing a home, the biggest challenge for many is coming up with the necessary funds for a down payment and closing costs here in the Alpharetta, GA area. Lending guidelines are fairly strict when it comes to “sourcing” the cash needed to close on a property. Acceptable sources for sufficient funds to close essentially means any account that you own.

Your funds can come from a checking or savings account, for example. When tapping into a bank account, your name must appear on the statements. If there is an additional name on the statement and that person will not be buying a home with you, unless that individual signs a letter stating all the funds in the account can be used by you, you’ll only be able to use half the amount in the bank.

You may also tap into a retirement account such as your 401(k) or IRA. You can use funds received from the sale of an appraisable asset. For instance, you can sell your car and use those funds to help buy and finance your purchase. But in all instances, you must provide a paper trail from beginning to end. This also applies when you receive a financial gift.

All mortgage programs allow for a financial gift to help with part or all of the needed funds. But in the instance of receiving a gift there are some extra steps to take documenting the transfer of funds from the donor to your bank account.

First, you’ll need a gift letter signed by the donor. The letter must show the names and relationship of the donor, the amount of the gift, the subject property address and a statement that the funds are in fact a gift and not a loan. No repayment is expected. The letter must also be signed by both parties.

When the funds are transferred, the donors can be expected to identify the source of the funds such as a bank account. The donors can then wire the funds to the buyer’s bank account directly. The amount of the transfer must match exactly the amount listed on the gift letter. The buyers need to provide a copy of the wire transfer and an updated bank statement showing the deposit occurred.

Writing a check should be avoided as the paper trail will take too long. The check would have to be deposited, cleared along with a front and back copy of the cancelled check. Gift funds may also be wired directly to the settlement agent. Again, pay close attention to the paper trail. If you anticipate receiving a financial gift when buying a home, give me a call ahead of time and I can review this process with you as well as provide a preapproved gift letter you can use.

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