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.
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:
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:
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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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.
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