How to Use Gift Money for VA Loan Closing Costs in California

VA loans offer a number of compelling benefits for California military members and veterans who are buying homes. Through this program, an eligible borrower can finance up to 100% of the purchase price, eliminating the need for a down payment.

But there’s another big benefit that many people don’t know about.

The Department of Veterans Affairs allows home buyers with VA loans to use gift money for their closing costs. This means that a borrower can use money from a family member or longtime friend to help cover the closing costs associated with a home purchase.

This benefit can help military members and veterans overcome one of the upfront hurdles associated with a home purchase. By using gift money to help cover the closing costs on a VA loan, California home buyers can reduce their own out-of-pocket expense.

Definitions: VA Loans, Closing Costs, Gift Money

Before we go any further, let’s cover the three most important terms being used throughout this article.

VA Loans: VA loans are mortgage loans offered to eligible veterans, active-duty service members, and certain members of the National Guard and Reserve. This loan program helps veterans and their families purchase homes with favorable terms, such as no down payment requirements and competitive interest rates, making homeownership more accessible.

Closing Costs: These are the various fees and expenses a home buyer must pay in order to finalize a mortgage loan transaction and home purchase. All types of mortgage loans come with closing costs, and that applies to VA home loans as well. The cost can vary due to a number of variables but typically ranges from 2% to 5% of the home’s purchase price. Closing costs include lender-related fees like origination fees and discount points, along with non-lender fees like escrow company charges and transfer taxes.

Gift Money: This is when a family member or other approved donor provides a sum of money to a home buyer to help cover their down payment and/or closing costs. Lenders often require a gift letter, signed by the donor, to verify that the funds are a genuine gift and not an interpersonal loan.

Average Closing Costs for VA Loans in California

In California, closing costs for VA loans typically range from 2% to 5% of the purchase price. But those numbers aren’t set in stone.

In a state like California, with higher-than-average home prices, the closing costs associated with a mortgage loan can add up to a significant amount of money.

When this article was published in late summer of 2023, the median home value for the state of California was around $750,000. Applying the 2% to 5% range mentioned earlier, this means that the closing costs for a VA loan might range from $15,000 to well over $30,000.

But there are two pieces of good news here, when it comes to the VA loan program:

• California home buyers who use a VA loan can finance up to 100% of the purchase price, eliminating the need for a down payment. This can greatly reduce the upfront expense associated with a home purchase, helping to pave the way for homeownership.
• The second piece of good news has to do with gift money. As mentioned in this article’s introduction, home buyers in California who use VA loans can apply gift money to their closing costs. This means they can receive financial support from a friend or family member who is willing to donate money toward their closing costs.

Using Gift Money From a Third Party

These days, most types of mortgage loans allow borrowers to use a certain amount of gift money to help cover their down payment or closing costs. This is true for the VA loan program as well. The Department of Veterans Affairs allows home buyers in California to apply gift money to their closing costs.

But there are certain rules and requirements regarding the use of gift money for VA-guaranteed mortgage loans. For one thing, the person donating the money will have to provide a signed letter stating that they do not expect any kind of repayment.

In other words, the money must truly be a gift with no strings attached.

According to the Department of Veterans Affairs: “A gift can be provided by a donor that does not have any affiliation with the builder, developer, real estate agent, or any other interested party to the transaction.”

They go on to state that the gift letter must include the following components:

1. The exact dollar amount of the gift
2. A statement from the donor that no repayment is expected
3. The donor’s name, phone number, address, and relationship to the borrower

That’s pretty straightforward. In fact, a person could meet these requirements with a one-paragraph letter followed by a signature block and contact info. Here is a sample letter that meets all of the VA’s requirements stated above:

I, [donor name], hereby certify that on September 21, 2023 I gave a gift of [dollar amount] to my [relation to borrower] [borrower’s name] for the purchase of the property located at [address of home being purchased]. This is a gift and not a loan. No repayment is required or expected, nor would it be accepted.

[Date]
[Donor signature]
[Donor address]
[Donor telephone number]

Other Benefits Offered by This Program

Being able to use gift money for the closing costs on a VA loan is a pretty big benefit, especially in a pricey real estate market like California. But this program offers other important benefits as well, including the following:

No down payment. An eligible borrower can use this program to buy a house with no down payment. This feature eliminates one of the biggest obstacles to homeownership.

No mortgage insurance. With a conventional mortgage loan, a home buyer who makes a relatively low down payment will have to pay mortgage insurance to offset the risk. This is true for the FHA loan program as well, which requires its own form of mortgage insurance. But this kind of insurance is not required for VA home loans.

Flexible criteria. As we wrote in a previous blog post, VA loans are one of the easiest types of mortgage loans to qualify for. That’s because the federal government provides lenders with a partial guarantee against losses resulting from borrower default. Because of this, lenders can be more flexible with their qualification criteria.

Use it more than once. The VA home loan benefit is not a one-and-done type of situation. You can use the program again and again, as long as you meet the minimum eligibility requirements. For example, a person with a VA loan who sells the home and pays off the mortgage debt will restore their entitlement. This means they could use the program again when purchasing their next home.

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Have questions? Bridgepoint Funding specializes in the VA loan program and serves borrowers all across the state of California. If you have questions about closing costs, gift money, or any other aspect of this program, please contact our knowledgeable staff!