Buying a home can be a difficult process. Luckily, VA gift funds make that process easier. Veterans can use gift funds to cover home-buying costs from down payments to closing costs.
In this article, we break down what gift funds are and how you can use them.
What are Gift Funds?
A gift fund is a money given to a Veteran by family members and relatives to help purchase a home. There are two types of payment gift categories.
The first class of gift funds is money received from family members and close friends. The second category includes non-loan funds derived from government programs for home-buying.
Gifted funds are undoubtedly beneficial when purchasing a home, but some regulations and guidelines must be followed.
VA Loan Rules for Down Payment Assistance and Gift Funds
There are a few rules associated with VA gift funds, the most significant of which is the gift letter requirement. The gift letter is written documentation that the money received follows regulations and guidelines.
Part of the gift letter requirements is to verify that the sender is not associated with a loan. It is possible to use gift funds for VA loans, but the sender cannot be an interested party in the loan. This includes builders, developers, real estate agents, or anyone who stands to profit from the loan.
A record must also be kept of when the funds were sent and when they were received. Wire transfer receipts and bank statements are often used to document the gift transaction.
What is “Proper” Documentation for Gift Funds?
Gift funds are just that, gifts; a written statement is required to verify that the sender does not expect any repayment.
The written declaration is a legally binding document. It verifies that the money received comes from acceptable sources and is not a loan. Acceptable sources for gifting money are any means that are not loans themselves, such as credit card withdrawals or bank loans.
Additionally, the donor must verify personal information, including their name, contact information, and their relationship to the recipient. The dollar amount of the gift must also be included.
Depending on the loan program, the donor’s bank statements may also be required.
What Gift Funds Can Pay For
Gifted funds can be used toward any costs a Veteran incurs when buying a home. Typically, this involves a down payment or closing costs. Given that Veterans qualify for no-money-down loans, many Veterans are approved for a $0 down payment.
However, closing costs can get pricey. A majority of funds are used to cover closing costs and associated expenses. Gifts can also be used to pay VA loans, including FHA loans, and mortgage payments, but additional regulations may apply.
How Much Can Be Gifted?
Gifts exceeding $16,000 per person no longer hold the same tax benefits. To avoid any unindented tax consequences, ensure that no one doner exceeds this limit.
Donors can choose to exceed payments of $16,000. In this case, it is important to communicate that the donor will be required to pay a gift tax.
What Happens if You Pay Back a Gifted Down Payment?
Gift money cannot be used as a loan. Donors sign a legally binding contract when they send the written statement required for gift funds. Paying back a gifted down payment would breach this contract and could result in legal problems.
To find out if you qualify for VA loans or gift funds give us a call at (602)-908-5849.