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Using Gift Funds to Cover Down Payment and Closing Costs

When it comes time to make the down payment on your home and pay any related settlement charges (think title insurance, property taxes, and origination fees), most of us want to keep as much money in our pocket as we can. While often advertised, zero down payment options are rarely available (unless of course you are a veteran or qualify for a USDA loan).

But don’t worry just yet; the use of gift funds is still an option for those struggling to make the required down payment. We’ll give you the bad news first; gifts cannot be used to purchase investment property. However, the good news is that if you are looking for one-to-four unit primary residence or a second home with at least a twenty percent down payment or a one-unit primary residence with a down payment of less than twenty percent, Fannie Mae does not require the borrower to make a minimum contribution. This means that the entire amount needed to complete the transaction can come from a gift. If you have two-to-four unit primary residence, a second home, or a high-balance mortgage loan, the borrower must contribute a minimum of five percent (3 percent in the case of certain first time homebuyers using a MyCommunity Mortgage) of the purchase price from their own funds. Despite this minimum contribution requirement, the borrower still has the option to use gift funds to cover the remainder of the down payment, closing costs, and reserves. This can come in handy when trying to meet minimum cash to close requirements.