Q &A: First-time Buyer Needs Cash Gift

Q:  I am applying for a mortgage to buy my first home. I have a great job and  savings for a down payment. However, my parents insist that I have a 20 percent down payment, and they're willing to contribute some of those funds. A guy at work told me I need to get a gift letter from my parents. What does that mean?

Your mortgage lender should be able to tell you exactly what your letter needs to say. He or she may even have a form. In general, if your parents donate the cash toward your down payment or closing costs, they will be asked to provide a signed statement that discloses their names, relationship to you, address and contact information, and specifies the date and amount of the cash gift.

The gift letter must also clearly indicate that the funds provided are a gift to you with no repayment required. They'll also be asked for bank statements proving that they have the cash to give you, and you have to show some proof that you received the money -- a copy of the check and your deposit slip, for example, and a printout of your account activity.

A few things to keep in mind:

  • In general, mortgage lending requirements do not allow anyone profiting from the purchase of your home to donate a cash gift. For example, your real estate agent or mortgage broker cannot provide a cash gift even if he or she is related to you.
  • There's more. Anyone affiliated with those involved in the purchase of your home or your mortgage loan cannot provide a cash gift. These rules are intended to ensure that your home purchase and mortgage process are "arm's length" transactions and that you were not coerced or pressured to make a decision based on the offer of a cash gift.
  • You can  expect your mortgage lender to verify all information contained in your gift letter; additional documentation of the gift may be required.

Plan on getting pre-approved for a mortgage before looking for your home. This allows your mortgage lender to identify and resolve situations that can delay mortgage approval before you make an offer to buy a home.

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