What is the purpose of gift funds and what documentation is typically required?

• A. Gift funds assist with down payment or closing costs; requires a gift letter, confirmation of funds transfer, and donor information.
• B. Gift funds are forbidden in most loans; no documentation required.
• C. Gift funds replace income verification; requires W-2s.
• D. Gift funds only cover appraisal fees; requires appraisal report.

Answer: (A)

Gifts are money given to a borrower to help with the down payment and closing costs, not a replacement for income. To keep the loan process transparent and ensure the funds are truly a gift, lenders require specific documentation: a gift letter from the donor that states the funds are a gift with no repayment obligation, evidence that the funds were actually transferred (such as a funds transfer confirmation or wire receipt), and information about the donor (name, relationship to the borrower, contact details). This documentation helps verify the source and availability of the funds and confirms there is no expectation of repayment, which could affect the borrower's debt-to-income calculation. Gift funds can come from family, a friend, or a charity, and are commonly used to cover part or all of the down payment and closing costs, but they are not used to replace income verification, and they do not cover only appraisal fees.