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USDA loans offer unique benefits for homebuyers in rural areas by allowing them to purchase a home with zero money down. This can be a significant advantage for many, but some borrowers may still want to make a down payment to reduce their monthly payments and build equity.
Gift funds can play a vital role in helping borrowers achieve their homeownership dreams while utilizing USDA loans. These funds refer to monetary gifts given to a homebuyer that can be used to help pay for a down payment, closing costs or other expenses when purchasing a home. Let’s explore how you can use gift funds with USDA loans.
Can you use gift funds on USDA loans?
Yes, gift funds can be used to finance USDA loans. However, adhering to specific guidelines and requirements is essential to ensure a smooth transaction.
USDA Gift Funds Guidelines
Before using gift funds for a USDA loan, lenders must verify that the funds originate from an approved source and that there's no expectation of repayment. Approved sources of gift funds for USDA loans include:
- Family members
- Employer or labor union
- Charitable organization
- Homeownership assistance grants and programs
It's important to note that cash gifts are not approved, as they cannot be easily traced to a specific bank account. Additionally, funds from any party involved in the real estate transaction, such as the seller, agent, builder or lender, are not considered valid gift sources.
Furthermore, each lender may have their own specific guidelines for gift funds. Consult with your loan officer to ensure compliance with their requirements.
USDA Gift Funds Requirements
When using gift funds in the USDA loan process, thorough documentation is essential to satisfy lender requirements. Make sure to prepare the following documents:
1. Donor information: Your lender will need detailed information about your donor, including their name, relationship to you and contact information.
2. Source verification: The donor must prove that the gift funds originate from their bank account. They must also provide a copy of their bank statement to verify they have enough funds to cover the amount of the gift.
3. Gift statement of intent: The donor must provide a signed statement affirming that the funds are a gift and there is no expectation of repayment.
4. Bank statements: Regardless of when you receive the gift funds during the homebuying process, you must provide your lender with a bank statement showing that the funds were deposited into your account unless the funds are paid directly to the lender.
5. Donor documentation: If the lender receives the funds directly from the donor at closing, they will require copies of the canceled check or a receipt for the wire transfer. The donor must also provide documentation showing the withdrawal of funds from their account.
Why do lenders need bank statements from gift funds?
Lenders require bank statements and documentation to ensure that the funds used for a USDA loan come from a legitimate and legally obtained source. These measures help verify transactions and track the flow of money, which is crucial when taking on a substantial financial commitment like a mortgage.
Gift Funds and USDA Closing Costs
As long as you can prove that the funds have been provided as a gift – generally by having the donor write a letter stating that the funds are a gift and do not have to be repaid – a family member, employer or charitable organization can assist you in paying your closing costs.
If you are considering using gift funds at any point while acquiring a USDA loan, it’s a good idea to consult your lender as soon as possible. For more information about usda gift funds guidelines and requirements, get started with a Neighbors Bank home loan specialist today.
