Using Gift Funds For The Down Payment And Closing Costs On Home Purchase

This Article Is About Using Gift Funds For The Down Payment And Closing Costs On Home Purchase

As the cost of homes keeps rising, we have seen more and more borrowers use gift funds. In this blog, we will detail how the gift fund process works as well as some agency guidelines surrounding the use of gift funds. If you are in the market for buying a home, you know the down payment and closing costs can add up quickly. While it is a misconception that you need 20% down to purchase a home, even coming up with 3.5% or 5% can be daunting. Many first-time homebuyers rely on family members to help them with the down payment and closing costs. The use of gift funds is becoming more and more popular. In this article, we will jump into specifics.

Using Gift Funds For The Down Payment And Closing Costs On Purchase: Gift Funds Explained

Using Gift Funds For The Down Payment And Closing Costs On Purchase

First, let us define the term “gift funds”. The word “GIFT” is part of the phrase for a reason. The gift-giver is sending money to a homebuyer without the expectation of being paid back. This is a true gift and there is no repayment associated with the money received. If the gifter plans on being paid back, that is no longer a “gift” and that is a “loan”. If you’re using a “loan” for funds to buy a house, the lender will be required to factor that repayment amount into your overall debt to income ratio. In many scenarios, this could hinder your qualifications. This is why the use of gift funds is so common, there is no payment associated with the money received. Hence the word gift.

Own Versus Using Gift Funds For The Down Payment And Closing Costs

Many realtors are familiar with the gift fund process because it is so common. In 2020, 58% of homebuyers came up with their own down payment for a primary residence. That leaves 42% utilizing down payment assistance, local assistance programs, or gift funds. Many first-time homebuyers utilize gift funds because they do not have the ability to sell their current home and utilize that equity to buy their next home. Getting into the housing market can be difficult but can create long-term wealth stability. A common example is selling your first home as your family grows and using the profits for the down payment on a larger home. Then many years down the road, it may be time to downsize, and that profit can assist with a stable retirement. This example ties into the American dream of homeownership.

Using Gift Funds For The Down Payment And Closing Costs And How Gifted Funds Used In A Home Purchase Transaction

How do you use gift funds? Gift funds are used to increase your available assets to buy a home. These funds may be utilized for a down payment, or closing costs, or a combination of the two. The gift can only come from two specific groups. A family member (which we will go into more detail about soon) or a government agency.

Family member -You must have a documentable relationship with the gifter. Usually, a family member is the path of least resistance. Your lender will be required to confirm your relationship with the gifter. The gifter will also sign a letter that indicates the money is a gift and there is no expectation of repayment. The letter must also document the relationship between the gifter and the giftee.

Using Gift Funds For The Down Payment And Closing Costs On Government Loans

Using Gift Funds For The Down Payment And Closing Costs On Government Loans

Government agency – Government agencies often provide down payment assistance to help first-time buyers (and repeat homebuyers) get into the housing market. Typically, this is done through local governments trying to boost their economy by growing the local population. A government agency will also sign a clear gift letter stating no repayment is expected. Many down payment assistance programs are not gifted funds through a government agency, but they are a standalone second mortgage on the property. If you are utilizing a government agency, it is important to know the difference between the two. Most of the time there is a prepayment penalty or a balloon payment required for down payment assistance programs through government agencies. 

How Are Gift Funds Used In The Mortgage Process And Acceptable As Qualified Funds

Now we will dive into the nuts and bolts of the gift fund operation. Utilizing gift funds seems easy enough but there are quite a few required documents. The lender is required to document evidence of the gift. The lender is required to see the gift-givers bank statement to show there are sufficient funds in the donor’s account to be able to provide the gift. The lender may also ask for the banking documentation to verify the gift funds have been transferred to the buyer’s account.

The lender must verify the funds in question are also “seasoned”. What does seasoning mean?  Seasoning means the assets must be in the account before the gift is given. Meaning the gifter cannot go get a loan to borrow the money to send as a gift, but it must be their own seasoned and verified funds. The funds must be available in the account in question. The lender cannot see a large deposit into the gifter’s account, as that will not pass seasoning requirements. 

Gift Letter

Gift letter – A lender is required to obtain a signed gift letter. A gift letter must be clear and contain certain pieces of information. Information required 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 to the borrower
  • The borrower’s name and signature
  • The letter but specifically state that no repayment is required

Who can give you a gift? This is a very important 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

As mentioned in this article, you must clearly define your relationship with the gifter in your gift letter. Underwriting may ask for additional documentation to verify the relationship.

Gifted Funds Needs To Be A Gift And Cannot Be Loan: It Cannot Be Repaid Back

Gifted Funds Needs To Be A Gift And Cannot Be Loan

Many clients ask if they can pay back the gifted amount. The answer to this scenario is NO. As stated above, this is considered a gift, and no repayment is necessary. If you are going to get the money from a family member as a loan, we must include that loan payment in your debt-to-income ratio. Technically, paying back gifted funds is considered mortgage fraud. It is important to understand you are liable for the monthly payment if you are paying back gifted funds. The easiest way to avoid mortgage fraud is, to be honest with your loan team. Your loan officer is on your team and is looking out for your best interest.

Lender Overlays On Gift Funds

Many lenders have lender overlays when it comes to the use of gift funds. A very common overlay is not allowing gift funds below a credit score below 640. The good news is, Gustan Cho Associates do not have lender overlays on any of their mortgage programs. We will go directly off agency guidelines when we are dealing with gift funds. Please understand that each agency has slightly different rules for gift funds. Follow the general rules from this blog and you will be good to utilize gift funds with our team. Having an educated mortgage team is very important when choosing a lender.

Gustan Cho Associates take great pride in being up to date on mortgage guidelines. For any questions surrounding gift funds please contact Mike Gracz on 630-659-7644 or send an email to [email protected] We are able to use gift funds regardless of credit score. We will only go off the agency guidelines. We look forward to assisting you and your family with your mortgage needs.

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