Even with loans that do not require a down payment, such as the VA and USDA programs, buyers still need cash to address closing costs. There are lender fees and non-lender fees to contend with as well as recurring costs such as property insurance and taxes. Lenders need to make sure there are enough funds to close at the settlement table and they do so via third-party means. Borrowers will provide recent copies of their bank or investment statements showing there are enough funds available and lenders can also forward a Verification of Deposit to the applicant’s bank or financial institution.
Bottom line, lenders want to make sure not just if there are enough funds available but that those same funds belong to the applicant. In addition, available funds must be properly “sourced,” meaning those funds must come from approved sources. Down payment money can’t be borrowed from a friend, for example.
There are also those fortunate ones who are receiving a financial gift to help out with the down payment, closing costs and cash reserves. But there are certain tracking rules that must be followed in order for the lender to count those funds toward available cash to close. $10,000 just can’t show up on a bank statement, it needs to be verified those funds were obtained following lending guidelines. What are those guidelines?
The first is to have a completed Gift Affidavit Letter included with the loan package. This letter will show the donor’s name and address and where the gift funds are coming from along with the specific amount of the gift. The gift letter will also indicate which account the donor will be using to help out with the gift. Donor bank statements aren’t needed but an indication and account numbers where the gift is coming from can be. The letter clearly states that the funds are a gift and there is no repayment required or expected.
In addition to proper sourcing and a completed, signed gift letter, tracking the funds from the donor to the settlement table is the final step. Donors can provide the buyers with a cashier’s check. The buyers would then deposit that check into their bank account along with a deposit slip showing the transaction and include a copy of the cashier’s check showing the buyer’s names on the front of the check. A regular check can also be used in lieu of a cashier’s check but the buyers must then provide a copy of the cancelled check, front and back. This obviously can take some time for the cancelled check to make it back to the original donor. Finally, wiring the funds from the donor’s account to the buyer’s bank account is likely the most convenient for all.
But there is one more method that might be the easiest of all and that is to wire the funds directly from the donor’s account to the settlement agent, bypassing the buyer’s involvement in the transaction. The lender would then include a copy of the final, signed copy of the settlement statement to be included with the gift letter.
If you’re going to receive a gift or think you might, you should first speak with your lender to verify their internal process. More than likely the lender has a preapproved Gift Letter it uses in-house. The lender can also provide the steps it will take to transfer the funds in proper, timely fashion to be at the settlement table at the exact time and place that you are.