Gift Funds For The Down Payment on a Home Purchase
In this guide on using gift funds for the down payment on a home purchase. We will cover how family can gift you the down payment and closing costs on your home purchase. Today, we will discuss using gift funds for a house down payment. Using gift funds for the down payment is allowable with many mortgage programs, and it has strict guidelines. In the following paragraphs, we will cover the topic of using gift funds for the down payment on a home purchase.
Can You Use Gift Funds For The Down Payment on a House?
Gift funds for the down payments can only come from approved sources. If you receive gift funds for the down payment, it can’t get repaid. If you plan on having gift funds for the down payment, you must first learn what type of documentation is required and what is acceptable in the eyes of mortgage lenders.
Who Can Gift Money To a Buyer Buy a House
You are not allowed to use funds from certain people. These people include those who would benefit from you buying a home. These people can consist of the seller, real estate agent, or mortgage lender, who cannot gift your down payment. Acceptable sources of gift funds include:
- Employers
- Local Government
- Close family or friends
- Charitable organizations
Note that seller concessions are not the same as gift funds. Sellers can contribute toward your closing costs up to certain limits. You document seller concessions in your real estate purchase contract.
Appropriate Ways to Document Gift Funds For The Down Payment
When using a gifted down payment when applying for a mortgage, you have to document these things:
- The money is a gift that you don’t need to repay.
- The donor has the money to give you.
- The money has been transferred to you.
How Do You Prove Gift Money For a Mortgage?
How do you prove this? You have to have a paper trail. First, a signed letter from the donor explaining that the money is for your down payment, including that the money is a gift, not a loan. The gift funds letter should include the gift amount and the donor’s name, address, telephone number, and relationship to you. To prove that you have the funds, you will need to show your bank statement or a copy of the donor’s check, for example.
Using Gift Funds For The Down Payment on Conventional Loans
For conventional (non-government) loans, the lender must verify that there is enough money to cover the gift in the donor’s account or that the money has already been transferred to you.
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Documentation Required By Underwriters For Gift Funds For The Down Payment
Acceptable documentation includes:
- Copy of the donor’s check and your deposit receipt
- A certified check if the money will go directly to the closing agent
- Copy of the donor’s withdrawal slip and your deposit receipt
- Receipt from the title company
- Copy of the check from the donor to the title company
Using Gift Funds For The Down Payment on FHA Loans
A similar process is needed if you are applying for an FHA Loan. If the money has been transferred to you already, provide a copy of the withdrawal document. The document needs to show the money came from the donor’s account and your deposit slip and bank statement showing the deposit.
If the donor is giving you a check to bring to your closing, you’ll need a statement showing the money in the donor’s account, and the withdrawal slip. You also need a copy of the official check. And if the donor is sending an electronic transfer, you need a copy of the transmittal.
What if you don’t have anyone to gift you funds?
If you are unfortunate and do not have a friend or family member who has that kind of spare cash lying around, there are other options to help with down payments.
Down Payment Assistance Programs
A downpayment can be close to $12,000 in some instances. Down payment Assistance, or DPA, comes from homeownership programs administered by charitable organizations or local government agencies. A substantial amount of property purchases can qualify for down payment assistance.
Using Seller Concessions For Seller-Paid Closing Costs
Most mortgage programs allow home sellers to cover some or all of your closing costs. It makes little difference to sellers whether they pay 5% of the purchase price in closing costs for you or accept an offer that’s discounted by 5%. But it can be much better for you to pay full price and negotiate closing costs instead. For example, your seller could pay for single-premium mortgage insurance, and you’d save hundreds of dollars each month.
Borrowed Funds for Closing Costs and Down Payment
Although Most mortgage programs do not allow you to borrow your down payment, you could take out a personal loan months before applying, put the money into savings, and use those savings for your down payment. After 60 days, all the funds, even the borrowed ones, become personal savings. Make sure that you disclose the loan on your application and list the monthly payment in your obligations.
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How Much Reserves Is Needed For a Mortgage
Reserves are saving that you can apply to pay your mortgage if you lose your job or somehow become unable to pay your mortgage. It is counted by months. For example, if you have cash in your account that totals $10,000, and your monthly mortgage payment is $1,000 each month, you have ten months of reserve cash in your account.
Some mortgage programs require a minimum amount of reserves or consider reserves when deciding to approve or decline your application. If you have a friend or family member willing to add your name to one of their savings accounts, and they will sign a letter stating that you have access to that cash, it can improve your chances of approval. Do this at least 60 days before applying for a home loan.
Using Gift Funds For Down Payment On Home Purchase Depends On Mortgage Loan Program
It will depend on what type of loan product you are applying for to determine the requirements needed to use gift funds. FHA and other government-backed mortgage programs allow borrowers to use gift funds for 100% of their down payment. Most conventional buyers who put at least 20% down can use gift funds for their entire down payment, even for a multifamily property or second home.
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Homebuyers with Less than 20% Down Payment on Conventional Loans
Buyers with less than 20% down and purchasing a single-family primary residence can also use gift funds for 100% of their down payment. Buyers of second homes and multi-unit properties must make a 5% down payment from their own funds. After the minimum borrower contribution has been met, gifts can be used to increase the down payment or cover closing costs and reserve requirements. Gift funds are only allowed for primary and second homes, not investment home financing.
Problems With Using Gift Funds For The Down Payment on a House
What if the person gifting you the down payment funds does not want to go through the process and provide bank statements? In that case, they can gift you the money before you apply for a mortgage. Wait until you can provide 60 days of statements showing the money in your account, and your friend won’t have to do a gift letter or bank statement.
Another potential problem is gift taxes. There is a limit to how much people can give you without being taxed on the gift. In 2021, that limit was $15,000. If a nice person wants to provide you with more than that, you can help him or her out by paying the gift tax.
Bank Statements on Using Gift Funds The Down Payment on a House
Remember that mortgage underwriters will only ask for 60 days’ bank statements, and any deposits prior to the 60 days will not be questioned. Do not provide statements showing the gift deposit. Wait until you have two months of statements with the money already in the account.
Using Gift Funds The House Down Payment and Closing Costs
Using gift funds for the down payment and closing costs on a home purchase is allowed on government and conventional loans. You can use gift funds for the down payment and closing costs. There are rules and regulations on gift funds. FHA, VA, USDA, Fannie Mae, and Freddie Mac allow permit gift funds to be used. Each loan program has its own lending guidelines on gift funds.
Mortgage underwriters will ensure they determine that the money is a gift, not a loan. Gift funds need to be a gift from a family member and cannot be paid back. A couple may get gift funds as their wedding gift from family or close relatives that they can use as a down payment for their home purchase.
How Underwriters View Gift Funds For The Down Payment on Home Purchase
Mortgage underwriters are the professionals who will review the borrower’s mortgage application. Underwriters decide whether to issue a mortgage loan approval or mortgage loan denial. The mortgage underwriter is probably the most critical person in the mortgage approval process.
This is because, ultimately, the underwriter is the person who issues the clear to close. Gift funds can be used for the down payment and closing costs. However, seller concessions and lender credit can only be used for closing costs. A clear to close means that the mortgage lender is ready to fund the loan.
What Are Mortgage Underwriters Looking For Using Gift Funds For The Down Payment
Mortgage underwriters will review the following:
- credit
- credit scores
- credit history
- past bankruptcy
- past foreclosure
- past short sale
- divorce decree
- child support payments
- alimony
- income
- assets
- all other liabilities
Using Seasoned funds
The lender will want to see that the money has been in your account for longer than six months. Additionally, they will want to ensure that the gifter didn’t go get a loan to borrow money, give it for the borrower to use, then expect payment back for the loan.
If the lender sees a large deposit in the gifter’s account, this will not pass the seasoning requirements.
Gift Letter
Gift letter – A lender is required to obtain a signed gift letter. A gift letter must be clear and contain specific pieces of information. The information needed is below:
- The total dollar amount of the gift
- The address of the home being purchased with the gift funds
- The name, address, and phone number of the donor
- The donor’s signature
- A description of the relationship with the borrower
- The borrower’s name and signature
- The letter states explicitly that no repayment is required.
Gift Donor Guidelines
Who can give you a gift? This is an essential question. Your only options are a government agency or a family member. According to Fannie Mae and Freddie Mac, a family member is deformed as a:
- Parent
- Children – including adopted, staff, and foster children, a sibling
- A grandparent
- Aunt or uncle
- Niece or nephew
- Domestic partner
- In some instances, a fiancé
You must clearly define your relationship with the gifter in your gift letter. Underwriting may ask for additional documentation to verify the connection.
If you do not have a down payment, do not let this deter you from applying for a mortgage. You can ask your family and friend for a gift; however, there are instances where they volunteer. If that fails, look into down payment assistance programs.
