When buying a home you may be able to take advantage of gift funds. If you are a little light on cash, and many home buyers are, having enough cash available for closing costs or down payment isn’t feasible. But, don’t give up on your dream home yet.
Some home loans allow borrowers to receive gift funds to pay for specific parts of a home purchase. Gift funds help remove one of the major barriers to home ownership for many Americans – upfront costs. A gift fund is exactly as the name implies. It’s monies given to the buyer to use towards the purchase of a home. The best part is that this money does not have to be paid back. In fact, there must not be any expectation from the donor that the money needs to be repaid. In other words, it can’t be a loan from the donor in order for it to be considered a gift.
However, there is one catch. The gift must come from a family member. Family members that could qualify would be siblings, parents, grandparents or even your spouse. Fannie Mae and Freddie Mac define a family member as a spouse, child or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship.
There are situations where you could make the case that a godparent should qualify because they are like family because they have been part of your family your entire life. There may be other examples you could think of but it is at the underwriter’s discretion to give the green-light on such a decision. You may need to have documented proof of the life-long relationship that the underwriter would ask for before approving the gift.
Can I Give A Gift Fund?
If you are reading this you might be considering giving someone you know a gift fund. That’s great! You must be feeling very generous. Giving a gift can help your relatives in a BIG way. How much you want to give is up to you but some loans may have some stipulations.
Don’t forget there are taxes to consider. If you want to be exempt from them you better know the rules. A parent can give their child a gift tax-exempt up to $15,000. Each parent of a married couple can give up to $15,000 for a total of $30,000. If you decide you want to give more you will pay gift taxes that range from 18% up to a rate of 40%.
What Is A Gift Letter?
The borrower receiving the gift funds will need to give a letter to the mortgage company explaining who the gift is coming from and that the money is strictly a gift and not a loan that needs repayment.
The donor, once the gift is given, must also provide the letter that has specific information that includes:
- Phone number
- The relationship to the gift fund receiver
- The exact dollar amount being given
- The date the funds were transferred
- The address of the property being purchased of which the funds are for
- Print and sign your signature
Tip: Keep the letter concise and don’t provide any useless or irrelevant information.
Be sure to keep track of your transfer. If you write a check make a copy of it. You might also need to provide bank statements showing the money in your account for a specific amount of time.
FHA Loans and Gift Funds
If the borrower is applying for an FHA loan they must be able to put down at least 3.5% of their own money. Lenders like to see that the borrower has some stake in the home loan or as some say the buyer needs to have some “skin in the game”. With that said:
- Gift funds are only allowable for primary residences if using FHA
- Buyers may not receive gift funds for second homes or investment properties
- Current FHA guidelines allow for the full minimum required down payment to be gifted
Conventional Loans and Gift Funds
If your loan is conventional there are some slightly different guidelines that need to be followed.
- If you are putting down less than 20% there is also no minimum contribution required. All the funds needed to complete the transaction can be a gift.
You can use gift funds for both primary and secondary homes.
- If the property is a 2 – 4 unit the borrower must make a minimum of 5% contribution and be using one of the units as their primary residence.
After You Get Your Gift Money What’s Next?
Once you have the gift money in hand what do you do next? The first thing you should do is talk to your mortgage broker about where, when, and how you should deposit the money. Putting your money in the wrong bank account, not having any record of the transaction, or adding the funds at the wrong time could seriously affect your loan approval status. Be sure you do everything the way your lender requires so that there are no hiccups in your loan process.
Typically, the underwriter will want to see a copy of the donor’s check and the borrower’s deposit slip. They might prefer to see the donor’s withdrawal slip and the borrower’s deposit slip. For some lenders, a copy of the donor’s check to the closing agent is the preferred verification. Again, be sure you talk this through with your mortgage broker.
An underwriter will review everything you and your loan officer have prepared in addition to all the other documentation you are required to submit. Once it all gets sorted out and you are lucky enough to have your loan approved your gift funds will be applied to the loan estimate your mortgage broker has prepared for you and your title agent will be able to tell you what you need to bring on closing day. Congratulations and good luck with your new home.