The USDA loan program offers $0 down home loans to purchase properties in non-urban areas.
Even though USDA loans are available with no money down, buyers still encounter upfront expenses. Sometimes they might need help covering their closing costs. Others might want to make a down payment and build equity from the beginning.
USDA loan gift funds are one possible solution.
Borrowers are able to use USDA loan gift funds for a down payment of closing costs, as long as the funds can be verified and they meet other loan program and lender requirements.
Verification of Funds
If you want to use gift funds, your lender will need to verify that they came from an acceptable source. More importantly, they need verification that the funds were a gift in the true sense of the word, and that there is no expectation of repayment.
Acceptable sources of gift funds include:
- Family members
- Employer or labor union
- Charitable organization
- Homeownership Assistance Grants and Programs
Your donor will need to provide evidence that the gift funds came from their bank account, along with a signed statement verifying that they don't expect to be repaid.
Funds that came from any party involved in the real estate transaction (seller, real estate agent, builder or lender) are not acceptable.
According to the USDA Handbook, there are two ways to handle USDA loans and gift funds:
- The applicant has the funds in their account when they apply for the loan. In this case, you'll need to provide a copy of the donor's cancelled check and a bank statement verifying the deposit into your account.
- The applicant receives gift funds at closing. Some borrowers choose to have their donor cut a check or wire money directly to the title company handling their loan closing. You'll need to save copies of the cancelled check or the wire transfer receipt. The donor will also need to provide evidence that the funds were withdrawn from their account.
Since it's so difficult to trace, cash is never an acceptable source of gift funds.
Lenders can also have their own policies and guidelines when it comes to gift funds. Check with your loan officer for more details.
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USDA Closing Costs
Like with any other home loan product and purchase, USDA borrowers will encounter closing costs. These fees include title fees, lender fees and the cost of your appraisal, to name a few. The bill usually comes to about 3-5% of your total loan amount.
Sometimes sellers will cover a portion or even all of a USDA buyer's closing costs. But that's not always feasible. In those cases, qualified buyers may be able to pay their closing costs using verified gift funds.
While gift funds can help buyers build equity or cover their closing costs, they cannot be used to satisfy any cash reserve requirements.