Weddings and home buying often go hand-in-hand, but those cash gifts from family come with rules.
Wells Fargo executive director of mortgage sustainability Rulon Washington joins Wealth to explain the use of a gift letter, when you'll need to use it, and the information that has to be included in it.
Also catch BNY Wealth's strategist Jere Doyle share the best ways to go about planning your estate and passing down your house.
To watch more expert insights and analysis on the latest market action, check out more Wealth here.
Well, according to an April Redfin survey by Ipsos, 13% of current home owners received cash gifts from family for down payments on a home. And nearly 17% who soon plan to buy said they plan on using cash gifts. And if you're getting help, there is a little extra paperwork that you'll have to deal with. Americans receiving gift funds for their home purchase likely need something called a gift letter. Here to explain, we've got Roland Washington, executive director of Mortgage Sustainability at Wells Fargo. Roland, great to have you back on the program. So, can you just explain what a gift letter is and who exactly needs one?
Well, Brad, it's wedding season. So, that's a great question. Gift letters are one of the keys to validating where gifts are actually coming from, right? And so, it's the lender's way of making sure that that gift that you're receiving is not a loan or something that needs to be repaid. So, verifying your income is a critical step in the lending process. So, it's best to work with your lender to understand the specific rules around the loan type, to provide them necessary documentation to verify the funds. So, that way, they are, in fact, really able to bona fide gift. Gift letters are one of the many ways to validate, but there are the key reasons for you to be able to describe where those funds are coming from.
What information is usually in these gift letters? It's not just, "Hey, congratulations, you've made this huge milestone in your life and here's some money." What typically has to be in it?
Yeah. So, the donor, it's usually information around how they were able to provide that gift. There's going to be a wait, an area for you to sign, the signature area as well too. Ultimately, what could happen is it could be a handwritten letter or it could be a template that could be provided by your lender. So, it's standard information, but the goal is to get enough information on that letter to determine that it is truly a gift, right? So, it's a signed testament saying, "Hey, this is a gift for you, it doesn't need to be repaid, it is not a form of debt, it is not a loan." So, the gift letter could be standardized, but it needs to be signed by both parties, the gift and also donor.
Now, excuse me for, if this sounds very basic, but if a couple gets married and someone stashes 100 bucks in a card and writes "Enjoy your first home as a married couple," is that considered gift funds? And do you need the letter for that?
Good, good question. So timing plays a big part in that, right? So, if your lender's looking at your bank statements and they see a $100 deposit from three months ago, they're probably not going to bug you about it, right? But what, the issue is when there's multiple deposits that are in that bank statement and that lender's trying to identify if that's a form of income or if that's a loan, right? So, that $100, that gift letter is always important to provide some validation to what those funds are for. But ultimately, $100 is not that big of an issue. The larger amounts are when you really have to be providing tons of documentation. So, they're a bit more scrutinized when you get the $1,000 or the $2,000 in that deposit. But $100, depending on the timing, if it's seasoned fund, which means it's 60 days plus in your bank statement, it's usually a little bit better, little bit easier to validate those funds with your lender.
There are different requirements typically, right, depending upon the type of home or the loan that you're seeking for that home, and what might they be?
Yeah. So, for a conventional mortgage, usually, when you're getting a gift, it's focused on your primary residence or a second home. Usually, investment properties, you're not able to use those gifts, right? And then you think about an FHA loan or a VA loan, gifts, they're a little bit more lenient, right? So you're able to get a gift from a family member, a friend, a coworker, someone from your union, someone from your church, and so there's a little bit more leniency. But with FHA and VA loans, you're not able to use those gifts towards a second home or an investment property. So speak with your lender and really try to get an understanding of what some of the rules of engagement are around using gift funds. The property types do vary, but having that conversation with your lender could put you on the straight and narrow.
And so this starts to get into this next question of how the requirements essentially change if it's your primary residence versus a vacation home.
Right, right. So, a conventional mortgage, if you have, it's a second home, right? If it's a part-time home, you're not using it for an investment, you're able to use those gift funds. Really the gift funds are just a form of down payment. When you think about using gift funds towards a down payment, it's essentially helping you buy down the unpaid principal balance when you're taking out the loan, right? So essentially, we want to make sure as the lender that, you know, you're able to afford that current mortgage. So if it is a second home and you're living in there, you're not using it for an investment property, gift funds can be used for a second property like a vacation home.
Roland, thanks so much for the tips as always, good to see you.
Thank you.