Sometimes you’re given the gift of knowledge. I’ve had at least five excellent teachers and mentors that had an enormous influence on my writing and what I’m doing today.
The gift can even be a good friend who has seen you both laugh and cry – someone who’s always there.
You may think of all these things as great gifts you’ve obtained over the course of your life, but did you know the down payment on your house can be a gift? It’s true.
In this post, we’ll go over how you can use gift funds to help fund your down payment or other mortgage-related costs.
Who Can Give a Gift?
Before we go over the different types of gifts and what they’re used for, we first need to discuss where the gift can come from. For Fannie Mae, Freddie Mac, jumbo and VA mortgages, the gift must come from a member of your immediate family (including your spouse, domestic partner or fiancé) or close extended family (grandparents, aunts or uncles).
With an FHA mortgage, the gift can come from any of those sources or the following:
- A close friend who wants to see you do well
- An employer
- A labor union
- A government agency
- A public entity such as a nonprofit that provides homeownership to families of low to moderate income first-time home buyers
You can use this search engine to find nonprofits that provide FHA assistance in your area.
There are two types of gifts that your relatives or contacts can provide: a cash down payment gift or, in the event a family member is selling the property to you, a gift of equity. In each case, the funds may be used for the down payment, closing costs and prepaid interest points. Depending on the type of loan, you may also be able to use the gift in order to pay off debts so you can qualify for your mortgage. In certain situations, a client has to have a certain amount of payment coming from their own funds:
- A 5% contribution is required on certain conventional loans if the down payment is less than 20%.
- There’s a required 5% client contribution on all jumbo loans.
- If your credit score is between 580 and 619, 3.5% of your FHA down payment has to come from your personal funds.
Show Me the Money: Cash Down Payment Gifts
A cash down payment gift is pretty straightforward. You get money from one of the sources above and use it toward your down payment and costs. There are a couple of things your lender will need from you in order to use the gift:
- A gift letter (including, among other things, the amount of the gift and a statement that it doesn’t have to be paid back)
- Evidence of the transfer of funds
You can show evidence of the transfer with the donor’s withdrawal slip and your deposit slip, or a copy of the check and evidence that it’s been deposited into your account. If the gift is made at closing, there must be a copy of the donor’s certified check and a settlement statement with the exact amount of the gift.
For FHA loans coming from a family member or close friend, some additional documentation is required.
We need a copy of the canceled or certified check. We also have to be able to verify that the donor had the money for the check in the account for at least 30 days prior to the gift. This is verified through bank statements.
If the donor borrowed the funds, they need to be able to document the source. The gift cannot come from cash the donor has on hand.
The Family Discount: Gifts of Equity
A gift of equity occurs when someone (usually required to be a family member) sells you a property for below the sale price. The difference between the price you pay and the listed price is considered an amount of equity to be used toward your down payment or to help pay off debt to qualify. It can also be used toward your points and closing costs.
On FHA loans, a client can also get a gift of equity from a nonprofit agency or his or her in-laws.
Gifts of equity are not allowed on VA and jumbo loans.
In order to use the gift of equity, a client must include a gift letter, just as if they were being given a cash down payment. Minimum client contribution requirements still apply as well.
That’s the lowdown on down payment gifts. If you still have questions, let us know in the comments.
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