Can I Use Gift Funds for a Stated Income Loan?

Are you interested in the process of getting approved for a stated income loan? These non-QM loans are particularly helpful for some of our clients who don’t have the typical income streams but are ready to invest in a primary residence, a second home, or an income property.

Some of the common questions we get are related to gift funds. Here’s what you need to know about using gift funds for your stated income loan.

What is a stated income loan?

If you’re not familiar with this type of loan, we’re always available to talk with you more to find out if it’s a good fit for your needs. Stated income loans provide a convenient option for borrowers with non-traditional income sources. A stated income loan is a type of mortgage where the borrower simply states their income without providing traditional proof such as pay stubs, tax returns, or other documentation typically required by lenders. Instead, we can verify your income based on your bank statements and reserves, without the need to provide W-2s and other typical documentation.

What are gift funds?

Gift funds are monetary gifts given to a homebuyer to help with the costs associated with purchasing a home, such as the down payment, closing costs, or reserves. These funds are typically provided by family members, though other parties, like close friends or employers, may sometimes be allowed.

To be considered gift funds, there are some criteria that need to be met:

• The funds must come from an acceptable source. Most of the time gift funds come from immediate family members such as parents, grandparents, siblings, or children. In some cases, funds from close friends, godparents, or employers may be allowed, so talk to your loan officer if you have questions.
• The donor must provide a gift letter, which is a formal statement declaring that the funds are a gift and not a loan. This letter must include the donor’s name, address, and contact information; the relationship to the borrower; the amount of the gift; and a clear statement that the money does not need to be repaid. Both the donor and the recipient typically need to sign this letter. We can help you make sure the letter will qualify.
• You will need proof that the donor has the financial ability to give the gift. This often involves providing bank statements or other financial documents showing the donor’s account balance and the withdrawal of the gift amount.
• The transfer of funds must be documented to ensure transparency. This usually involves providing copies of the donor’s withdrawal slip or check, the recipient’s deposit slip, and updated bank statements showing the transfer.

Gift funds can be used in several ways to help you reach your goals. One of the most common uses of gift funds is to help cover the down payment. Gift funds can also be used to cover closing costs, which can range from 2% to 5% of the loan amount.

Are there any unique benefits to using gift funds?

Gift funds can significantly reduce the amount of personal savings needed for a down payment and closing costs, making homeownership more accessible.

There are also benefits to having a larger down payment, even if you don’t necessarily need gift funds to have enough. A larger down payment, made possible with gift funds, can result in a lower loan-to-value (LTV) ratio. This can lead to lower interest rates and better loan terms because our underwriters see your loan as less risky.

With additional funds available, you may also be able to afford a more expensive home or bid more competitively in a hot housing market. Gift funds can sometimes be used to meet reserve requirements, as well.

Can I use gift funds for a stated income loan?

Every lender is going to have different answers to this question. For us, it’s a yes! You can use gift funds to make the down payment for your stated income loan, as long as you are buying a primary residence or a second home. If you’re planning to buy an income property or a vacation home when you already own two or more homes, then gift funds won’t be allowed.

Not sure how your scenario applies? We’re always here to help you navigate the loan application process.

We have years of experience helping our clients find a creative and strategic financing solution to help them reach their goals, and all that experience has led to a level of expertise you don’t want to miss out on. Contact us any time to learn more about applying for a stated income loan or finding out what type of non-QM loan might be best for you.