Gift Funds and VA Loans: What They Are and How to Use Them

VA loans provide Veterans with numerous potential benefits, one of them being a $0 downpayment. While no downpayment can save you a considerable amount of cash, it is important to factor in closing costs.

Closing costs can end up being thousands of dollars, which can sometimes put a financial strain on potential homebuyers. Luckily, the VA allows gift funds from friends or family members to contribute towards the cost.

What are Gift Funds?

Gift funds are money that Veteran homebuyers receive to put towards any costs associated with purchasing a home. Gift funds must be given with no expectation of repayment of those funds at a later time.

If there is an expectation of those funds being repaid, the VA lender must factor the loan repayment in the borrower’s debt-to-income ratio.

Gift funds are allowable on VA loans as long as they come from a family member or similar relationship. Additionally, that gift must leave a legitimate paper trail in a bank account or financial institution. Examples of this are a canceled check or electronic fund transfer documentation.

VA Loan Gift Fund Requirements

VA gift fund guidelines are clear. In order to use the funds, Veterans must show through a certified letter or another type of documentation that the funds are indeed a gift.

Veteran borrowers must provide a specific letter that contains all key information about the gift of money. This includes:

• The amount of money given to the individual
• The date the funds are transferred to the borrower
• Specific language that states there is no expectation of repayment of the funds
• That no one involved in the loan transaction is the gifter of these funds

Keep in mind that the VA does not require a gifter bank statement as is common in some other loan programs.

Is There a Limit on Gift Funds for VA Loans?

There is no limit on the amount of money a person may gift a Veteran. However, there are tax implications that may play a role in this. As of 2022, the annual exclusion for gifts is $16,000. That means that the gifter can give up to this amount without having to report the transaction to the IRS.

What Gift Fund Can Pay For

Gift funds typically can be applied to down payments for the home, however, Veterans with their full VA entitlement will not have a down payment. Gift funds may also be used to cover closing costs.

It’s possible to use VA gift funds for other purposes as long as they relate to the obtaining of the loan. VA lenders may have other rules regarding the use of gift funds, so be sure to check.

Gift Funds for Alternative Loan Types

If you decide to use gift funds for other types of loans rather than a VA loan, different rules and guidelines may apply. For example, a gifter's bank statement is required when obtaining an FHA loan. Also, USDA borrowers may be able to obtain gift funds from non-profits and charities as well.

While gift funds could help when it comes to purchasing your next home, it's important to stay up to date on all gift fund rules before applying for a VA loan. For help with your particular situation, be sure to contact your VA lender for additional insights.