If you have a gift you want to use for your down payment, you might run into trouble during the underwriting stage of getting your mortgage.
Saving for a home can be stressful and time consuming.
For those who have a friend or family member willing to give them a portion of that amount for the down payment, they’ll be able to buy their home more quickly.
Funds given specifically for a home purchase without the intent of repayment are called gift funds, and they are simply a gift.
The money is given with the understanding that the giver has no financial possession of the home and that the money will not be repaid.
Otherwise, the money would be considered a loan or investment and would need to be reported to the lender.
For someone to receive gift funds, the process isn’t as simple as accepting a check.
The lender providing the mortgage still needs to make sure that the home buyer can make payments on a monthly basis and that the gift funds came from an acceptable and approved source.
Who can give gift funds for a down payment or closing costs?
The person giving the funds is called the donor. There are certain restrictions on gift funds and who can be a donor.
For instance, the donor cannot have a vested interest in the sale of the property. It cannot be the real estate agent, the seller or the home builder.
Depending on the type of loan certain donors are allowed to give gift funds while others are excluded.
Conventional loans will only allow gift funds to come from family members or a domestic partner.
FHA Loans can come from close friends or extended family as well as gifts from employers, labor unions and charitable organizations.
This also includes entities that provide homeowner assistance to first-time home buyers or those who need low-income assistance.
USDA and VA loans – Gift funds can come from anyone except someone with a vested interest in the property.
What will a lender require for gift funds?
A home buyer receiving a gift needs a “gift letter”, stating the amount of the gift, who it’s from and the donors relationship to the buyer, the date the funds were received and the donor’s contact information.
The gift letter will also need to verify that the amount does not need to be repaid. Both the home buyer and the donor should sign the letter.
Templates and samples of gift fund letters can be found online or an example can be provided by the lender.
Writing a letter confirming the gift loan protects both home buyer and donor and confirms that the transaction meets the restrictions on who can gift the funds.
Ideally the gift will be in the buyer’s bank account two or more months before the closing date.
Is there a limit on the amount gifted?
It’s understood that gift funds will not be repaid. Family members expecting a repayment can be putting the borrower at risk.
All loans and all money that needs to be repaid will need to be factored into the debt-to-income ratio by the lender, which is why it’s so important to recognize that gift funds will not be reimbursed.
For an FHA loan, the entire down payment amount can be gifted. All of the down payment can also be donated for a conventional loan if the down payment is more than 20%.
If it is less than 20%, then 5% of the amount being put down can be a gift. This can certain help home buyers in the long run. By putting at least 20% of a down payment on a home, borrowers may end up with lower interest rates or won’t be required to pay certain fees. This could mean a lower monthly payment and perhaps even paying for a home more quickly.
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