September 16th, 2019 6:54 PM by ERA Big Sun Realty
Did you know that approximately 1 in 4 first time homebuyers will use gift funds to purchase their home? According to the National Association of Realtors Profile of Homebuyers and Sellers, 24% of first time homebuyers used gift funds for their down payments. Since the rules regarding gift funds vary by loan type, check out these tips to ensure a smoother loan process.
Gift funds for mortgages have specific rules on who the gift can come from. Most loans allow gift funds to come from immediate family members such as parents, siblings, spouses, and domestic partners or close extended family such as grandparents, aunts, and uncles. The gift funds must be given with the expectation that they are a gift and that the funds will not be paid back.
The amount of the gift funds that can be received will vary based on loan type and sometimes the buyer’s credit score. For example, for conventional loans, if the buyer is putting down more than 20% then all of the down payment can be gifted. If it’s less than 20%, then a portion of the down payment must come from the buyer’s own funds. With FHA loans, all of the down payment can be gifted unless the credit score is below 620. If the credit score is below 620, 3.5% of the down payment must come from the buyer’s own funds and the gift funds received can be used towards additional down payment or closing costs. As a side note for the gift fund donor, tax law restricts how much money can be gifted to a family member per year tax free. Be sure to check with an accountant to see what current law allows.
When giving gift funds for a mortgage, the lender is going to require a gift letter. This letter typically includes donor name, relationship to the borrower, date and amount of the gift given, and proof it was received. The lender may also require bank statements from the donor depending on loan type. The reason for this is that the lender must be sure the donor has the ability to give the gift.
Understandably, some family members are uncomfortable sharing their financial information with other family members. Conventional loans allow the donor to wire the gift funds at closing and thus negate the need for bank statements. Another alternative is to receive gift funds from the donor as early as possible in the home search process. When a borrower begins the loan process they must provide the previous 2 months bank statements. Any funds that are already in the account at that time are considered “seasoned” and would not require additional documentation.
Since gift fund rules vary depending on loan type, it’s best to consult a mortgage professional to assist the buyer with the specific guidelines and documentation required by the buyer and the donor to ensure a smooth loan process and closing.