Using Gift Funds for Your VA Home Loan

If you’re a veteran considering purchasing a home using your VA home loan benefit you may be wondering if you can use gift funds to help cover costs like the down payment or closing costs. The short answer is yes – VA loans allow borrowers to use gift funds for many mortgage-related expenses.

What Are Gift Funds?

Gift funds refer to money given by a friend or family member to help the borrower pay for costs associated with buying a home. The key is that these funds are an outright gift, with no expectation of repayment As long as the gift funds are properly documented, they can make it easier for borrowers to cover upfront costs when purchasing a home with a VA loan

Allowable Uses for Gift Funds with VA Loans

Veterans can use gift funds for a variety of purposes when obtaining a VA mortgage:

• Down payment – While VA loans don’t require any down payment for eligible borrowers, some may still choose to make one. Gift funds can help cover all or part of the down payment.

• Closing costs – Closing costs like origination fees, appraisal fees, and title fees can add up. Gift funds are a great way to offset these charges.

• VA funding fee – Most VA loans require borrowers to pay a VA funding fee, which can be 2-3% of the loan amount. Gift funds can cover this mandatory fee.

• Prepaids – Prepaid costs like homeowners insurance premiums, interest, and property taxes due at closing are also eligible expenses for gift funds.

Requirements for Using Gift Funds with a VA Loan

While VA loans allow gift funds, there are a few guidelines borrowers must follow:

• Get a gift letter – The lender will require a gift letter signed by both parties stating the amount of the gift and that there is no expectation of repayment.

• Show transfer evidence – Documents like a canceled check or bank statement showing the transfer will need to be provided.

• No creditors can be gift givers – The gift funds cannot come from someone with an interest in the sale like the seller, realtor, or builder.

As long as you satisfy these requirements, there is no limit on the amount of gift funds that can be used with a VA loan. However, lenders may require additional verification for large gift amounts.

The Gift Funds Process

If you plan to use gift funds for your VA home purchase, follow these steps:

1. Inform your lender – Let them know you plan to receive a financial gift for closing costs.

2. Have gift giver draft letter – They’ll need to write a gift letter adhering to your lender’s specifications.

3. Transfer gift amount – The gift giver will need to transfer the funds via check, wire transfer, etc. and provide documentation.

4. Submit letter and evidence – You’ll provide these documents to your lender to verify the gift.

5. Lender verifies info – They will validate the gift letter and evidence to approve using the funds.

6. Gift applied at closing – The gift funds will then be credited to your eligible closing costs.

It’s important to communicate with your lender early in the process if you want to take advantage of gift funds. This ensures proper documentation and a smooth closing.

Pros of Using Gift Funds with a VA Loan

There are many benefits to using gift funds for Veterans who want to purchase a home with their VA entitlement:

• Less cash needed – Gift funds reduce the amount of cash a borrower needs to close. This helps Veterans who don’t have substantial savings.

• Avoids VA loan limits – Gift funds don’t count against the VA loan limits, allowing borrowers to get more home for their money.

• No repayment needed – Borrowers don’t take on debt by accepting properly documented gift funds.

• Less out-of-pocket – Closing costs come due at closing. Gift funds help reduce the immediate outlay of cash.

• Easier to qualify – Funds can help borrowers qualify by covering assets, down payments, or closing costs.

• No limit on amount – VA has no cap on how much can be gifted, unlike FHA and conventional loans.

Things to Watch Out For When Using Gift Funds

While gift funds provide excellent benefits for eligible VA borrowers, there are a few cautions to keep in mind:

• Don’t expect repayment – The lender will verify the gift does not need to be repaid.

• Document funds early – Work with your lender upfront to properly document the gift.

• No sellers or creditors – VA prohibits interested parties from being the gift giver.

• Lender policies – Each lender may have their own overlay rules regarding gift funds.

• Tax implications – If over the annual exclusion amount, the gift giver may face taxes.

• Large amounts – A large gift may require more scrutiny from the lender.

As long as you follow VA requirements and lender guidelines, gift funds can make it easier to buy a home with your VA loan benefit. Just be sure to document the gift properly. If you have questions, your loan officer can walk you through the process.