Gifts as Down Payment to Purchase a Home
Down payment funding alternatives
For many buyers, especially first-time buyers, saving up the funds for the down payment can be a seemingly insurmountable hurdle to home ownership. This doesn’t have to be the case. As your mortgage broker, I can help you find creative ways to come up with your down payment.
One way to fund a down payment is by using a gift. For many loan programs, a gift may be used for a portion or all of the required down payment. Money given as a gift for a down payment can’t come from anyone. Family members are the usual source. And sometimes an employer may also be acceptable. If this is an option open to you, please let me know. I can help you determine which loan programs accept gift funds for down payments and who may give the gift. I’ll also supply the gift letter that the person giving the gift is required to sign. The gift letter states that the funds are a gift and will not be paid back.
Using a gift for your down payment
Fannie/ Freddie Any gift is allowed if a borrower comes in with their own 5%. If down payment is pure gift then the gift must be 20%. Gift funds need to be sources with a gift letter and proof of the source bank account
FHA Any gift is allowed as well. If down payment is pure gift then the gift amount must be 5% of the purchase price. Gift funds need to be sources with a gift letter and proof of the source bank account
This Year Give the Gift that Keeps on Giving- A House
I am constantly asked by my customers, “what are the gifting guidelines?” It is something that varies from mortgage loan program to mortgage loan program and should be reviewed in detail because families can now pool their kindness together to help out a family member take advantage of a home purchase and the $8000 first time homebuyer tax incentive.
As Seen on Huliq.com
First let us look at the gifting guidelines for a FHA purchase. If a homebuyer wants to go buy a home through FHA he or she typically needs to put down 3.5% of the purchase price from their own funds in order to satisfy the minimum down payment requirement. If Aunt Betty wants to help out nephew John with the gift of down payment, she can gift 5% of the purchase price and lucky John can do 95% financing without digging into his own pocket. Please keep in mind that Aunt Betty will have to show the source of funds of her gift and nephew John will have to properly show receipt of the money. The gift money cannot be from under Aunt Betty’s mattress and she will have to sign a gift letter saying she does not expect any type of repayment. In an ideal world nephew John could now go buy the home and be on his way.
Unfortunately real estate transactions usually are not so simple. Thanks to items called pre-paid escrows and closing costs, the bottom line for the buyer usually will take more than just the 3.5% down payment required by FHA. Two other ways that we can remedy this situation for the buyer is to have seller paid closing costs and lender paid closing costs. If John is out looking for a home that a seller wishes to sell for $200,000 he can offer the seller $205,000 with $5,000 seller paid closing costs. This structures the financing with less money coming out of John’s pocket and still provides the same net proceeds for the seller. Another method less used is for the lender to pay closing costs. If the prevailing interest rate is 5%, the lender can price the loan at 5.25% or 5.5% and use the extra yield spread premium to pay some costs.
Looking at conventional financing through Fannie Mae or Freddie Mac, in order for the borrower to qualify with pure gift they must receive 20% in gift! That’s a lot of money. If the buyer has 5% of their own money to show they can receive little gifts here and there that are a much smaller percentage of the total cost. One way of gifting that I often encourage is on a much smaller scale. Whenever we are qualifying a buyer we always have to show a paper trail of source of funds for cash to close. We show the paystub going to the bank account which eventually becomes either escrow deposit or cash to close or reserves. What I say to the borrower is save every dime and let the family help out with things like food and gas and living expenses. This will help the homebuyer save quicker and get into a position of home ownership quicker without fouling up the paper trail for the lender. The family is happy to contribute on a smaller scale without giving nephew John a free ride.
Considering the $8,000 First Time Homebuyer Tax Credit, the grateful new homeowners will be in a good position to reciprocate the joy of gifting by having a few family gatherings over their place next year.
Written by Preston Ware
First South Mortgage
Email is firstname.lastname@example.org.
Down payment assistance charities
If a willing and able family member is not available, buyers now have the option of turning to a non-profit for down payment assistance.
Caution should be taken when searching for a down payment assistance charity (aka down payment assistance program). There are many reputable organizations providing buyer assistance, but there are dubious ones as well. You may want to research the charity with the Home Gift Providers Association (HGPA) (http://www.downpaymentalliance.org/) before making a commitment.
Generally, a down payment assistance charity will give the buyer money for a down payment that does not have to be repaid. The seller will contribute an equal sum to the charity at closing or soon after. The seller will also pay an administration fee to the charity. Sounds good, right?
This can be a good option for buyers who don’t have other means of securing a down payment. However, you should be aware that this means of funding the down payment may inflate the selling price of the house. You’ll want to consult with your real estate professional about how such a program may affect the selling price.
Zero down mortgage loans
Service persons and veterans can qualify for a VA Loan that requires no down payment. VA Loans are guaranteed by the U.S. Department of Veterans Affairs. In addition to no down payment, these loans usually offer a competitive fixed interest rate and limited closing costs. While the VA does not issue the loans, it does issue a certificate of eligibility required to apply for a VA loan.
There are also private sector alternatives that offer 100% financing of the home purchase price. Let me help you find the down payment and mortgage alternative that’s right for you.