Gift Funds For The Down Payment on a Home Purchase
Gift funds for the down payment on a home purchase are allowed on government and conventional loans for the down payment and closing costs. FHA, VA, USDA, Fannie Mae, and Freddie Mac allow gift funds to be used. However, there are rules and regulations with regard to gift funds. Each loan program has its own lending guidelines on gifts.
One of the major things mortgage underwriters will scrutinize is whether the gift funds are an actual gift and not a loan.
The gift needs to be a gift from a family member and cannot be paid back. Many families help each other out. For example, a parent may give their children gift funds to purchase a home. A grandparent may give their grandchild a gift used towards the down payment of their home purchase. A couple may get gift funds as their wedding gift from family or close relatives that they can use as a down payment for their home purchase
How Underwriters View Gift Funds For Down Payment On Home Purchase?
Mortgage underwriters are the folks who will analyze the borrower’s mortgage application. Underwriters decide whether to issue a mortgage loan approval or mortgage loan denial. The mortgage underwriter is probably the most important person in the mortgage approval process. This is because ultimately, the mortgage underwriter is the person who issues the clear to close. Gift funds can be used for both the down payment and closing costs. However, seller concessions and lender credit can only be used for closing costs. A clear-to-close means that the mortgage lender is ready to fund the loan. Mortgage underwriters will review the following:
- credit
- credit scores
- credit history
- past bankruptcy
- past foreclosure
- past short sale
- divorce decree
- child support payments
- alimony
- income
- assets
- all other liabilities
The Mortgage Underwriting Process
When a mortgage underwriter reviews borrowers’ assets, they will especially look for if they have enough funds to close on their home purchase transaction. Or if it is a refinance mortgage, they will see if the borrower has enough funds to close on their refinance mortgage loan. When mortgage underwriters see borrowers have enough funds to close, the next thing they will look at is whether those funds have been seasoned and sourced.
Mortgage underwriters will be reviewing 60 days of bank statements. Will pay special attention to large deposits and irregular deposits in the bank account and/or bank accounts.
The way underwriters view gifts is they want to make sure that gifts are actual gifts and not loans. The reason behind this is lenders do not want to see borrowers struggling to make mortgage payments. Plus a personal loan monthly payment that a borrower got for a down payment is an extra monthly debt payment that can stress borrowers in making their mortgage payments timely. This can cause a strain on the homeowner and increases the chances of the new home buyer being late or even defaulting on their new mortgage.
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How do Gift For Down Payment on a Home Purchase Work?
There are procedures on how gift funds for the down payment on home purchase work. A family member cannot just give a home buyer cash money and just deposit it in their bank account. Before accepting gift funds for the down payment on a home purchase, ask the loan officer for directions. The loan officer will clarify that gift for the down payment needs to be sourced. The donor of gift funds for the down payment on the home purchase needs to complete a gift letter.
How Does Gift For Home Purchase Work?
The gift letter states that the gift funds are not a loan and that the gift funds do not need to be paid back. The donor of the gift needs to provide 30 days of the donor’s bank statement showing that the gift funds were seasoned in the donor’s bank account for at least 30 days. The gift funds leaving the donor’s account need to be reflected in the bank statement of the donor. The recipient of the gift needs to provide a copy of the check, and the deposit slip. A new bank transactional history printout that is signed, dated, and stamped by the bank teller reflecting the funds in the bank account of the recipient needs to be provided.
Gift Letter
The following information needs to be on the gift letter. The donor’s name, address, and phone number
- The gift donor’s name, address, and phone number
- The gift donor’s relationship with the home buyer/recipient
- The dollar amount of the gift funds for the down payment
- The date the funds that transferred to the recipient
- A statement from the gift donor that the gift is not a loan and a gift and that no repayment is not expected
- The gift donor’s signature
The address of the property being purchased.
Maximum Limit on Gift For Home Purchase
The number of gift funds for the down payment on a home purchase in relation to how much of your own money you need to put down will depend on the type of loan program it is. Here are the restrictions on the number of gift funds you can receive depending on the type of mortgage loan program.
Fannie Mae Gift Funds Guidelines
With Conventional loans, it used to be if buyers are putting a 20% down payment or more, then the whole amount of the down payment can be gifted. All 20% down payments can be gifted. If putting less than a 20% down payment, part of the gift funds for the down payment can be gifted. However, part of the down payment needs to be from the borrower’s own funds. Now, this old rule has changed. Borrowers can now get gift funds from family no matter how much they are putting down. The minimum amount of own funds depended on the type of loan borrowers apply for. Gift funds for a down payment are only limited to primary owner-occupant homes and second homes. Cannot have gift funds for investment home financing. Click here to apply for Fannie Mae Loans
Benefits of Gift Funds for the Down Payment on a Home Purchase
- Easier Access to Homeownership
Gift funds can significantly reduce the financial burden of saving for a down payment, making it easier for first-time homebuyers to enter the housing market. - Lower Loan Amount
Using gift funds for a down payment can reduce the amount of money you need to borrow, resulting in lower monthly mortgage payments and potentially saving you thousands of dollars in interest over the life of the loan. - Better Loan Terms
A larger down payment, facilitated by gift funds, can improve your loan-to-value (LTV) ratio. This can qualify you for better loan terms, such as lower interest rates, leading to substantial savings over time. - Avoiding Private Mortgage Insurance (PMI)
If your down payment is 20% or more of the home’s purchase price, you can avoid the additional cost of private mortgage insurance (PMI). Gift funds can help you reach this threshold more easily. - Increased Buying Power
Additional funds for a down payment can increase your buying power, allowing you to consider a wider range of properties that might otherwise be out of reach. - Faster Loan Approval
A larger down payment can make you a more attractive borrower in the eyes of lenders, potentially speeding up the loan approval process. - Financial Flexibility
By using gift funds for the down payment, you can preserve your personal savings for other expenses, such as moving costs, home improvements, or emergency reserves. - Reduced Financial Stress
Financial assistance from family or friends can alleviate some of the stress associated with home buying, allowing you to focus on finding the right property and settling into your new home. - Strengthened Family Bonds
Accepting gift funds from family members can strengthen familial ties, as the assistance reflects a shared commitment to your future and well-being. - Potential Tax Benefits
Although the recipient typically does not owe taxes on gift funds, the donor may benefit from the annual gift tax exclusion, which allows them to give a certain amount without incurring gift tax.
Frequently Asked Questions (FAQs)
- What is gift fund for a down payment?
Gift funds are money given by a relative, friend, or organization to help a homebuyer with the down payment on a home. These funds do not need to be repaid. - Who can provide gift fund?
Family members, including parents, grandparents, siblings, or other relatives, can typically provide gift funds. Sometimes, close friends or charitable organizations may also be acceptable sources. - Are there any limitations on using gift fund for a down payment?
Yes, lenders often have specific guidelines regarding gift funds, including who can provide them, how they should be documented, and how they impact loan approval. - What documentation is required to use gift fund?
You will require a gift letter from the donor, which includes the donor’s name, address, relationship to the buyer, the amount of the gift funds, and a statement that the funds are a gift and do not need to be paid back. Additionally, proof of the transfer of funds may be required. - What should be included in a gift letter?
A gift letter should include:
The donor’s name, address, and phone number
The recipient’s name and relationship to the donor
The amount of the gift
The date the gift was given
A statement that the gift does not need to be repaid
The donor’s signature - How do lenders verify gift fund?
Lenders typically verify gift funds by reviewing the gift letter and obtaining documentation of the fund’s transfer, such as bank statements or wire transfer receipts showing the donor’s and recipient’s accounts. - Are gift fund allowed for all types of mortgage loans?
Gift funds are allowed for most mortgage loans, including conventional, FHA, VA, and USDA loans. However, each loan program may have specific requirements and restrictions. - Do gift fund affect loan eligibility or terms?
While gift funds can help meet the down payment requirement, they may impact loan eligibility or terms based on the lender’s guidelines. Discussing this with your lender to understand how gift funds may affect your mortgage application is important. - Are there any tax implications for receiving gift fund?
Generally, the recipient of the gift funds does not have to pay taxes on the gift. However, the donor may be subject to gift tax rules if the amount exceeds the annual exclusion limit set by the IRS. - What is the annual exclusion limit for gift tax purposes?
As of 2024, the annual exclusion limit for gift tax purposes is $17,000 per recipient. Gifts above this amount may require the donor to file a gift tax return, though they may only owe taxes if they have exceeded their lifetime gift tax exemption. - Can I use gift fund for other costs related to home purchases?
Gift funds can often be used for closing costs, prepaid items, and reserves in addition to the down payment, depending on the lender’s requirements and the loan program. - How should I approach my lender about using gift funds?
It’s important to inform your lender that you will use gift funds early in the mortgage application process. They will provide specific instructions and documentation requirements to ensure the funds are acceptable. - What if the donor wants to remain anonymous?
Lenders require full disclosure of the source of all funds used in a home purchase, including gift funds. Anonymous gifts are not allowed, as they cannot be properly verified or documented.
Gift Fund Guidelines on FHA And VA Loans
Both FHA Loans and VA Loans allow 100% gift funds for the down payments on home purchases. Even though there are no down payment requirements for VA Loans, those wishing to put money down on their home purchases on VA loans can get all of the down payment for home purchases as gift funds.
For borrowers with credit scores between 580 and 619, many lenders have overlays where 3.5% of the down payment needs to be from their own funds.
All FHA loans and VA loans are for primary owner-occupant homes only. Homebuyers can only use gift funds for owner-occupant residences only. To qualify for a mortgage with a direct lender with no overlays on government and conventional loans, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.
