The VA home loan program boasts a ton of incredible benefits, but the two biggest might be these: Qualified borrowers dont need to put a downpayment on a VA loan, and theres no cap on how much a seller can pay toward your closing costs.
Unfortunately, in terms of the latter, theres no guarantee that youll get a seller to agree to pay all of those costs. Its certainly a common outcome, especially in a buyers market, but every purchasing situation is different. You can roll the VA Funding Fee into the loan — or not pay it at all if you have a service-connected disability — but otherwise those costs have to be paid before the loan can close.
So what happens if youre on the hook for at least a portion of those costs?
There are a couple different potential solutions. One is that you might be able to pay those costs using gift funds from a family member or close friend.
Gift funds are exactly what they sound like — someone gives you money with no strings attached. But there are certain rules and requirements for all loan types, from VA and FHA to USDA and conventional, when it comes to using someone elses money toward your home purchase.
Purchasing a home is an exciting milestone, but it also requires a significant financial investment If you’re eligible for a VA home loan, you can buy with no down payment. However, you’ll still need to pay closing costs, which average 3-5% of the loan amount This can easily add up to thousands of dollars.
If you don’t have enough cash on hand to cover these fees, using gift funds from family or friends is a smart option. Here’s what VA homebuyers need to know about receiving and using gift funds.
What Are Gift Funds?
Gift funds refer to money given to the homebuyer by a relative, domestic partner, fiancé/fiancée, or other individual with a clearly defined relationship with the buyer. This money is given freely, with no expectation of repayment.
The giver can be a relative like a parent, sibling, or grandparent. Friends can also provide gift funds as long as they aren’t involved in the transaction, like the real estate agent or loan officer.
Gift funds can be used for the down payment, closing costs, or prepaid items like homeowner’s insurance and property taxes. They provide an alternative source of funds when the buyer doesn’t have enough of their own cash on hand.
VA Rules for Gift Funds
The VA allows borrowers to use gift funds toward their home purchase. However, there are guidelines lenders must follow:
- The gift donor and their relationship to the borrower must be identified.
- The transfer of funds must be documented from the donor’s account to the borrower. A copy of the check, withdrawal slip, etc. must be provided.
- The lender must verify that the gift funds were not provided by an unacceptable source connected to the transaction like the seller, real estate agent, or lender.
- The borrower must provide a gift letter stating that no repayment is expected.
As long as these requirements are met, there’s no limit on the amount of gift funds a borrower can receive or use toward their VA loan.
Using Gift Funds for Down Payment
One of the main perks of VA loans is that no down payment is required. However, borrowers can still opt to make a down payment to lower their loan amount and monthly payments.
Gift funds provide an easy way to make a down payment, especially for first-time homebuyers who likely haven’t built up savings yet
For example, let’s say you qualify for a $300,000 VA loan. The required 25% minimum down payment on a conventional $300,000 loan would be $75,000.
For a VA loan, you could put 0% down. But if your parents gifted you $10,000 for a down payment, you could put 3% down to lower your loan amount.
Using Gift Funds for Closing Costs
Closing costs are the fees charged to finalize and fund the home loan. With VA loans, closing costs average 3-5% of the total loan amount.
So on a $300,000 loan, you can expect to pay $9,000 – $15,000 in closing costs. Common fees include:
- Origination fees
- Appraisal fees
- Credit report fees
- Taxes and insurance
- VA funding fee
Closing costs are due at closing. Gift funds provide an easy way to cover these charges if you don’t have sufficient cash reserves yourself.
For example, your cousin could gift you $10,000 to be used only toward closing costs on your VA loan. This eliminates the need to pay those charges out of pocket.
Documenting and Transferring Gift Funds
To use gift funds with a VA loan, you’ll need to document where the money came from and show evidence that you received it. Here are the steps:
1. Identify the gift donor. The lender will require their full name, address, phone number, relationship to you, and amount of the gift.
2. Provide a gift letter. This letter states that the funds are a gift with no obligation for you to repay. The donor will need to sign this letter.
3. Document the transfer. You’ll need to show documentation like a bank statement or withdrawal slip showing the funds coming from the donor’s account. Cancelled check images or wire transfer confirmations work too.
4. Deposit gift funds into your account. The lender will need to see evidence that the money was deposited into your bank account. This verifies that you have access to the funds.
Following these steps ensures everything is properly documented in accordance with VA requirements.
Pros of Using Gift Funds
There are many benefits to using gift funds toward your VA home loan:
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Pay less out-of-pocket. Gift funds reduce the amount you need to pay in down payment and closing costs. This helps buyers who don’t have enough cash reserves.
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Buy sooner. Since you have to save less, gift funds allow you to buy a home sooner rather than spending years saving up.
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Lower monthly payments. You can make a larger down payment with gifts, which lowers your loan balance and monthly mortgage payments.
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Pay off debts. Some lenders allow you to use gift funds to pay off credit card, auto, or student loan debts to improve your debt-to-income ratio. Ask your lender if this is possible.
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Improve approval chances. Gift funds can help overcome approval obstacles like insufficient funds or a high debt load.
As long as VA guidelines are followed, there really aren’t any downsides to using gift funds. They provide an excellent option for buyers who need help covering costs.
Alternatives If Gifts Aren’t Possible
Using gift funds requires having family or friends who are both willing and able to provide money for your home purchase. However, this isn’t always possible.
Here are some alternatives if gift funds aren’t an option:
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Request the seller to pay closing costs. Seller concessions are unlimited with VA loans.
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Look into down payment assistance programs offered in your state or county. These programs provide grants or low-interest second mortgages to help with down payment and closing costs.
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Save up more or improve your credit score. This will put you in a better position to buy in a few months or years.
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Consider a lower-priced home. This reduces the down payment and closing costs needed.
If you have challenges coming up with cash to close, discuss all possible options with your VA lender. A loan officer can guide you on the best approach for your situation.
The Bottom Line
Gift funds provide an excellent solution if you need help covering some of the upfront costs to close on your VA loan. Just make sure to follow the documentation steps outlined in this guide. Pay attention to the relationship, transfer, and usage rules too. This ensures your VA home loan goes through smoothly using funds gifted from family and friends.
What Gift Funds Can Pay For
Gift funds can be used towards a variety of different mortgage-related expenses. The most common use of gift funds is for down payment, the VA Funding Fee or other closing costs. Gift funds can be used towards any fee related to closing the home loan.
Many of the requirements are the same for other loan types. But there are some unique differences that are important to note.
For example, youll need to have a gifter bank statement on FHA loans. Borrowers seeking a conventional loan who cant put down at least 20 percent must have at least 5 percent of their own funds in the loan. USDA borrowers can receive gift funds from charitable organizations, nonprofits and even municipalities.
Learn more about VA closing costs and what might be possible using your VA home loan benefits — talk with a Veterans United VA Loan Expert at 855-870-8845.
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About Our Editorial Process
Veterans United is recognized as the leading VA lender in the nation, unmatched in our specialization and expertise in VA loans. Our strict adherence to accuracy and the highest editorial standards guarantees our information is based on thoroughly vetted, unbiased research. Committed to excellence, we offer guidance to our nations Veterans, ensuring their homebuying experience is informed, seamless and secured with integrity.
Can a spouse provide gift funds if they will not be part of the loan?
Yes, the VA allows gift funds to come from a spouse if they are not on the loan.
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VA Loan Gift Funds And How They Work
FAQ
Are gift funds allowed on VA loans?
Can earnest money be a gift on a VA loan?
Can I give my VA loan to a family member?
What happens if a VA loan is given a gift?
When gift funds are being provided the lender is required under VA loan rules to “verify that sufficient funds to cover the gift have been transferred to the borrower’s account”, or that the money will be received at closing time.
Can I use gift funds to finance my Home with a VA loan?
Here’s what you need to know about using gift funds while financing your home with a VA loan. Though VA lenders in Colorado Springs allow you to use monetary gifts to cover closing costs or the VA funding fee, you’ll need to provide documentation for those gifts. In most instances, lenders will ask you and your gift giver to complete a gift letter.
What are VA gift funds?
Gift funds are money that Veteran homebuyers receive to put towards any costs associated with purchasing a home. Gift funds must be given with no expectation of repayment of those funds at a later time. If there is an expectation of those funds being repaid, the VA lender must factor the loan repayment in the borrower’s debt-to-income ratio.
Do you need a gift letter for a VA loan?
Additionally, some lenders may require such gift funds to be “seasoned” or left in a bank account for a minimum period of time such as three months. This requirement may vary depending on the lender. VA loan rules require the gift letter mentioned above to contain the following elements: