USDA Gift Funds: Requirements and Guidelines
While a down payment isn’t a requirement with a USDA loan, these mortgages aren’t free.
Not only are there the guarantee fee and closing costs to cover upfront, but if you’re looking for a lower mortgage payment or want to build equity faster, a down payment might be smart financially.
Fortunately, these funds don’t have to come out of your pocket. The USDA allows for gift funds on your down payment and closing costs, as long as the funds align with certain rules.
Are you looking to use gift funds on your USDA loan? Here’s what you need to know.
Gift funds refer to money that is donated to your home purchase. Maybe your parents want to pitch in and help you buy your first house, or your employer has a homebuying assistance program you can tap into as part of your benefits.
Whatever the reasoning, the funds must be gifts, meaning there is no interest charged and no expectation of repayment at any point.
Yes, you can use gift funds on USDA loans. Borrowers might use them to cover the closing costs on their loan — things like the appraisal fee, their lender’s origination fees, or even discount points to lower their interest rate, or they might use them to cover the USDA loan program’s guarantee fee, which costs 1% of your loan amount upfront.
Though the USDA loan program doesn’t require it, you can also use gift funds to make a down payment on your loan. You might do this if you want to lower your borrowing costs and monthly payment. Making a down payment will also help you build equity faster and possibly qualify for a lower interest rate (sometimes a larger down payment will help you do this).
First up, the gift funds have to come from an acceptable source. Family members are typically the most common source of gift funds — parents, grandparents, aunts, uncles, siblings, etc., but there are other options, too. See the chart below for a list of acceptable and unacceptable USDA gift fund sources.
| Acceptable gift fund sources | Not acceptable gift fund sources |
|---|---|
| Family members or those related to you by blood, marriage, or guardianship | Friends and colleagues |
| Employers and labor unions you’re a member of | Real estate agents |
| Charitable and non-profit organizations | Home sellers |
| Government agencies, including state and local housing departments | Mortgage lenders and brokers |
| Homeownership assistance programs and grants |
The biggest rule of thumb with gift fund sources is that the money cannot come from an interested party involved in the transaction, like your real estate agent or the person selling the home you’re buying. Talk to a loan officer if you’re unsure whether your gift fund source will meet these requirements.
Since cash is hard to trace and verify, it is not an acceptable way to receive gift funds for your USDA loan.
Instead, you will need to receive your gift funds in one of two ways:
You will also need to document the sourcing of your funds, which we’ll go into below.
To prove that your funds came from an acceptable source, you will need to provide some paperwork to your lender. This should include documents showing where the funds started, their transfer, and your eventual payment to the lender.
Documentation can include things like:
Your donor will also need to write and sign a letter stating that the money they gifted you is a donation and does not need to be repaid at any point. You’ll give this to your lender before closing on your loan.
Want to make sure you can use the gift funds you’ve been so generously given? Then make sure you follow the USDA’s rules:
| Do | Don't |
|---|---|
| Make sure your donor is an approved source | Accept gift funds from someone with an interest in your transaction |
| Fully document the path of the gift funds from start to finish | Forget to make copies of checks, bank account statements, and wire transfer receipts as they pertain to your gift funds |
| Use a check, wire transfer, or electronic transfer for moving your gift funds around | Take gift funds in the form of cash |
| Ask your donor to write a letter stating that the money does not need to be repaid | Agree to repay your donor or pay interest |
To ensure your USDA loan experience goes smoothly, choose a lender that’s well-versed in USDA lending, like Neighbors Bank. We can help answer questions, guide the way when it comes to gift funds, and walk you through the loan process from start to finish. Reach out today to get started with your USDA loan.
