Gift Funds For Down Payment Mortgage Guidelines
This BLOG On Gift Funds For Down Payment Mortgage Guidelines Was UPDATED On October 18th, 2018
There are two types of funds required when buying a new home.
- The down payment and the closing costs
- Most home buyers do not have to worry about closing costs because they can get the closing costs on a home purchase covered by either of two means or the combination of both:
- Home Buyers can get a sellers concession from the home buyer towards the buyers closing costs
- And/or get a lenders credit towards closing costs
Sellers Concessions For Closing Costs
Home sellers are allowed to give home buyers a sellers concession towards a home buyer’s closing costs.
- How this works is if a home seller bottom line is $100,000, the home seller can inflate the purchase price of the home to $103,000 and give the home buyer a $3,000 sellers concession towards closing costs
- This allows the home buyer can use it towards closing costs which includes the following:
- Title charges
- Attorney fees
- One year homeowners insurance
- Paying down the rate with points
- Escrows for taxes and insurance
- Other closing costs associated with the home purchase
- However, the home buyer cannot use any sellers concessions towards the down payment of their home purchase
- Buyers cannot have any excess in sellers concessions
- Any overage in sellers concessions needs to go back to the home seller
- Under RESPA Guidelines, kickbacks are illegal and are not allowed under any circumstances
Gift Funds For Down Payment On Home Purchase Can Also Be Used For Closing Costs
Home buyers can also get a lenders credit towards closing costs.
- For example, if a mortgage applicant got quoted a mortgage rate of 4.0% on a 30 year fixed rate loan, borrower can request a lender credit to cover part or all of his closing costs by requesting a higher mortgage rate
- For example, a borrower can choose a 4.25% mortgage rate for a $3,000 lender credit or a 4.5% mortgage rate for a $5,000 credit instead of choosing the 4.0% par rate
Gift Funds For Down Payment On Home Purchase Requirement
A down payment is required on a home purchase unless you are applying for a VA loan or a USDA loan where no down payment is required.
- FHA loan programs require a 3.5% down payment on a home purchase where a conventional loan will require a minimum of 5% down payment
- Many first time home buyers lack the down payment required for a home purchase so gift funds are accepted
- For example, borrowers who are a recently married couple and spent thousands of dollars on their wedding but both spouses have plenty of income to make their new mortgage payment but do not have the down payment for home purchase are able to get gift funds from family
- Parents, in-laws, grand parents, or relatives can gift borrowers for down payment on home purchase as long as the gift funds are sourced and documented
- A gift letter from the donor is signed and dated and stated that the gift funds is not a loan and does not have to be paid back
How An Underwriter Views Assets
Mortgage underwriters will be carefully reviewing borrowers income, liabilities, credit, credit history, and assets.
- Income is reviewed so they make sure that new homeowner is able to afford future home payment and other debts
- Liabilities are reviewed to make sure that the new housing payment will not put a strain on the new homeowner making their new mortgage payment
- Credit and credit history is reviewed to see payment pattern and is used to see the probability of the likelihood of future payment pattern
- Assets are reviewed and analyzed that borrower have sufficient funds to close and have skin in the game
- Mortgage underwriters will want to see that borrower have the down payment and closing costs in bank account
- And that those funds have been seasoned for at least 60 days
- Those who do not have sufficient funds for the down payment and/or closing costs, the mortgage approval process will come to a halt until the mortgage underwriter can verify that borrower have sufficient assets
- This is where gift funds can come into play where borrowers can get the gift funds towards their down payment and closing costs
- Large deposits will be questioned and needs to be sourced, otherwise, it cannot be used towards the down payment
How Gift Funds For Down Payment On Home Purchase Work
Home buyers who need to use gift funds towards their down payment will be needing the gift funds donor to write, sign, and date the gift funds letter to mortgage lender. Letter form is provided by the lender.
- Gift Letter states and clarifies that the gift funds is only a gift and not a loan and will not be paid back to the gift funds donor once the mortgage loan closes
- The gift funds letter should include the gift funds donor’s name, donor’s address, and gift funds donor’s telephone number
- The gift funds letter should state the relationship between the donor and the gift recipient and the date the gift funds were transferred from the donor’s bank account to the recipient bank accounts
- 30 days of the donor’s account showing that the gift funds were seasoned there and showing it leaving the donor’s account into the recipient’s account needs to be provided
- The gift funds recipient needs to show the copy of the gift funds check and deposit slip and show the balance of his or her bank statements after the gift funds have been deposited
Gift Funds For Down Payment On Home Purchase Depends On Mortgage Loan Program
Conventional loan programs and FHA loan programs have different types of requirements when it comes to gift funds.
- FHA loan programs and VA loan programs, 100% gift funds is allowed from family members and/or relatives for down payment on a home purchase if credit scores are over 620 FICO credit scores
- If credit scores fall between 580 and 619 credit scores, borrower must have at least 3.5% of own funds for the down payment
- Gift funds can only be used on primary home purchases
For conventional loans, if buyers who are putting a 20% or more down payment can get 100% gift funds for down payment on their home purchase.
- Home Buyers who are putting less than 20% down payment, portion of the down payment can be gifted funds but other portion of the down payment needs to come from the actual home buyers
- Gift funds are only allowed for primary and second homes and not investment home financing
Obstacles With Gift Funds For Down Payment On Home Purchase Donors
One of the major obstacles I often encounter is when the gift funds donor does not want to provide 30 days bank statements to the recipient.
- Gift fund donors do not reveal their finances, especially to their siblings and by providing 30 days bank statements to the recipient, the recipient will pretty much know their finances
- To avoid providing a gift letter and 30 days of bank statements, the donor needs to give the recipient the gift funds and the recipient needs to let those funds seasoned in their bank account for at least sixty days
- Remember that mortgage underwriters will only ask for 60 days bank statements and any deposits prior to the 60 days will not be questioned