Gift Funds For Home Purchase Mortgage Lending Guidelines
This Article Is About Gift Funds For Home Purchase Mortgage Lending Guidelines
HUD, the parent of FHA, allows gift funds to be used by homebuyers to use for their down payment and closing costs on FHA loans.
There are two types of costs involved when buying a home.
Closing costs on a home purchase can be covered by home sellers concessions by the sellers. In most cases, most or all of the seller’s concessions will cover the home buyer closing costs. The only thing the home buyer needs to worry about is the down payment for a home purchase. How much down payment is required for a home purchase? The down payment on a home purchase depends on the mortgage loan program.
FHA requires a minimum 3.5% down payment for home purchase on all FHA Loans. Fannie Mae has a 3% down payment conventional loan home purchase program for first-time homebuyers on conventional loans. Freddie Mac has a 3% down payment conventional loan home purchase program for home buyers who did not have ownership of a home in the past three years. Conventional loan programs require a 5% down payment on homebuyers who had an interest in a property in the past three years.
VA Loans and USDA Loans do not require any down payment for a home purchase. Jumbo mortgages require a 10% to 20% down payment on a home purchase. Condotels and non-warrantable condominium portfolio loans require a 20% to 25% down payment.
Many home buyers who do not have their own down payment on home purchase may get gift funds for the home purchase from a family member and/or relative for their down payment. In this article, we will discuss and cover Gift Funds For Home Purchase Mortgage Lending Guidelines.
How Gifts Funds For Home Purchase Works
Home Buyers who are getting gift funds for home purchase needs to have the gift donor sign a gift letter by the donor. The gift letter is provided by the lenders and states that the gift donor is gifting the gift funds for home purchase and that the gift funds are solely a gift and no repayment will be made and that it is not a loan. The gift funds donor also needs to provide 30 days of bank statements to the mortgage lender and the gift funds that are being gifted need to have been seasoned for at least 30 days.
Any large or irregular deposits on the bank account of the gift donor need to be sourced and explained. For example, if there was a $5,000 large deposit in the gift fund donor’s bank statement, and that large deposit was from a sale of a vehicle, the gift donor needs to provide the bill of sale, copy of the check from the vehicle buyers, the copy of the check, and deposit slip. The home buyer needs to show a copy of the check from the gift donor, a copy of the check, and a deposit slip. The money leaving the gift donor’s account needs to match the exact amount of the gift funds.
Many times, gift donors do not want to provide their personal banking statements. Signing the gift letter is not a problem. Many feel reluctant in providing the lender their personal bank statements. Unfortunately, in order for a lender to be able to use gift funds for home purchase, the above steps need to be followed and if the donor does not provide their bank statements, then the gift funds cannot be accepted. With conventional loans, the donors’ bank account is not required. All that is required is a copy of the canceled checks of the gift fund and the gift letter.
Can Gift Funds Be Used For Closing Costs And Reserves?
Gift Funds can be used for closing costs in the event if the home buyer is short to close on a home purchase. However, gift funds cannot be used for reserves. For borrowers who have credit scores under 600, the automated underwriting system may require three months’ reserves by the mortgage loan borrower. Reserves are one month’s principal, interest, taxes, insurance, also known as PITI.
Lenders do not require that reserves be deposited in any escrow or account. They just want to see borrowers have at least one month’s reserves in their own banking account, investment accounts, or other liquid asset accounts if AUS requests them. Reserves cannot be gifted funds and need to be the home loan borrower’s own funds. Borrowers do not have to have the reserves after closing on their home loan and the reserves are in no way restricted or monitored after the closing.
Cases Where Borrowers Cannot Get Automated Approval With Gift Funds
Gift Funds are not viewed favorably by Fannie Mae’s Automated Underwriting System. Even though gift funds for a home purchase are allowed, it is viewed as a weakness on behalf of the mortgage loan borrower. There are cases where borrowers who meet the minimum credit score requirements and debt to income ratio requirements and cannot get an approve/eligible per automated underwriting system and gets a referred/eligible per automated underwriting system. This is because the down payment for a home purchase is 100% gifted. This happens many times with 100% gift funds for a home purchase.
By removing the gift funds and submitting the file back as the borrower’s own funds, hold and behold the referred/eligible findings becomes an approve/eligible findings. Normally, cases, where borrowers have lower credit scores, many collection accounts, high debt to income ratios, are cases when the automated system does not like gift funds and renders a referred/eligible per automated findings.
Solutions To Eliminate Gift Funds For Home Purchase
Again, the automated underwriting system and mortgage underwriters do not view gift funds favorably and with mortgage loan applicants with less than perfect credit and high debt to income ratios, the automated underwriting system may reject an automated approval. If that is the case, try to remove the gift funds and see if you can have the gift funds deposited in a bank account and let it season for 60 days. Another solution in resolving gifted funds is to see if borrowers can add themselves to the gift donor’s bank account and make it a joint bank account. After adding themselves to the donor’s bank account, get a 60-day bank printout by the bank teller and have the bank teller sign, date, and stamp every page of the bank printout. The borrower will need a letter by the joint bank account holder stating that added-on account holder has full rights and access to the bank account. The letter needs to be submitted to the mortgage lender.