Buying a home can come with hefty price tags in the form of closing costs, property taxes, maintenance, etc. One of the biggest upfront costs is the down payment. Even if prospective homeowners are capable of handling the monthly expenses, it could take years for them to save up enough to put down on a house.
Enter: Gift Payments
Many families have adopted a tradition of transferring wealth by helping family members, such as their children, get into their first homes by contributing financial assistance in the form of a down payment. Parents (or grandparents) with a nest egg will offer a down payment to their children or grandchildren.
There is, however, a correct way of doing so, and mortgage lenders will need to know the details before they allow the use of it. When receiving money as a gift for a down payment, there are a clear set of guidelines that must be met in order to avoid any audits in light of the Patriot Act.
The Patriot Act was enacted by Congress in 2001, which was passed to combat money laundering and terrorist financing. The Patriot Act requires banks and financial institutions to have proper safeguards in place and notify law enforcement when they suspect suspicious banking activity. The Patriot Act’s main implication to the residential mortgage industry was to require each financial institution operating in the U.S. to have a Customer Identification Program to verify borrowers’ and mortgage applicants’ identities and alert law enforcement when suspicious activity or individuals are identified.
As a result, here are two key pointers for the correct way to gift and/or receive a down payment:
- Any gift transfers being made/offered should ALWAYS be wire transferred directly into the escrow holder for the purchase of the subject property. They should never be wired into the homebuyers account, as that will require a documented paper trail from the recipient and the donor, and can be painful to gather this information.
- The borrower will need to provide a gift letter to document this transfer. To make this easy for borrowers , Bluefire Mortgage Group will prepare the necessary gift letter(s) for all associated parties to sign.
If there is a gift down payment made to the borrower directly, and it does not follow these rules, we can still help you navigate through this process.
If you have questions regarding gift down payments and how to move forward with yours, please contact one of our loan officers at (760) 930-0569 and we will be happy to assist you.