Bob picked up his worn out guitar, and sat on the edge of my deck looking out over the 270-degree view of Las Vegas. Within minutes, fingers were dancing on strings like sparks from a fire; like kids on a swing.

I always wanted to write that. It has almost nothing to do with my blog. Well, nothing actually. My friend Bob, who wrote the song with that line, did just close on his first home today. Woo-hoo! And thinking of Bob and the challenges that face first-time homebuyers, it seemed like a great time to throw down a few reminders that could save you some stress if you are looking for your first home.

Bob lives in California, and insisted on using “a friend of a friend of his fiancee” as his Realtor. She’d never sold a home, but promised to give him 25% of her commission at closing. He’ll regret that forever. He and Lena nearly lost the home days before the scheduled close, and as Bob says, “That was the most expensive free money we ever got.” As I told Bob, experienced agents don’t discount their commission – and he should run like hell from an agent that doesn’t understand the value she brings to a complicated transaction. But he’s engaged, and saying “no” to Lena was not prudent.

Bob and his fiancee were using “gift funds” for their down payment. Lena’s parents were giving them an amount equal to the down payment, and the closing costs were shared by buyer and seller. Had his rookie agent known anything about lending, she would have advised him to consult with his mortgage agent from the beginning. And his lender would have known that Bob’s savings, which looked remarkably like down payment funds when the loan officer looked at his statements, were earmarked for a new boat, not a down payment. The lender would have been informed where the down payment was coming from had Bob realized this was crucial information.

Fast forward to some time shortly before the close of escrow. The lender orders the “verification of deposit” from their bank, and there is little money in the account for a down payment. Bob returns from a day of boating to a frantic message from his loan officer. “Lena’s parents are giving us the money,” the loan officer hears for the first time the following morning, right after Bob deposited the funds.

Bob and Lena had no idea that using gift funds requires that a few important steps take place prior to receiving this wonderful gift. Unfortunately, their loan officer was unable to stop them before they dumped tens of thousands of dollars into their account. I’ve seen this done before, and it creates a mess that can be nearly impossible to unwind. At the very least, it will probably hold up the closing, causing heartburn for everyone involved.

There are several important guidelines to follow when using gift funds. The borrower will have to provide a “gift letter” detailing the amount of the gift, and the name and relationship of the giver. There is a limit on how much of a gift can be received – always discuss this in advance with your lender. The letter must state that this is a gift, and not a loan. Your mortgage officer should be able to provide you with a sample letter, or a form. Obviously, both parties must sign the letter.

The funds will be “sourced,” so be sure that the giver will be able to show a paper trail. Where did the money come from? If it’s from existing funds in their bank account, the givers will likely need to provide bank statements for 60 days. If it’s from retirement funds, the lender will need to see a retirement account statement.

Since the gift letter must match the amount of the gift, be sure that you deposit certified funds from the giver in your account as one deposit. Bob took a personal check from Lena’s parents to the bank, and deposited it with his paycheck and a check for a jetski he had just sold. This small error, which was very preventable, held the closing up for an extra 11 days, and cost Bob and Lena $1100 in late fees.

Be sure your agent understands the basics of lending. And while you’re at it, be sure your agent has a verifiable track record. Don’t think that just because the seller is paying your agent’s commission, you aren’t in a position to demand quality service. Most importantly, talk to your loan officer in advance and be sure he knows you are using a gift for your down payment. Using “other people’s money” isn’t as easy as it was five years ago.