USING GIFT FUNDS TO BUY A HOME
For many homebuyers, gift funds are a needed boost to help them cover the necessary down payment on their dream home. Although it’s common practice to receive these financial gifts from friends and family, there are still many guidelines you should consider before you accept these funds.
Understanding how loan programs Affect gift funds
First, you should know which loan program you will be using and how that program dictates the use of gift funds. The most common programs for residential homebuyers are Conventional, FHA, VA and USDA. Though these programs are similar in that they allow you to use donated money to fund a home purchase, they do have differences in who can give you the gift, what percentage of the home’s purchase price you can receive as a gift and what, exactly, the money can pay for.
FHA loans: An FHA loan is backed by the Federal Housing Administration (FHA), a government agency set up to help Americans achieve their goal of homeownership. You can learn more about FH loans in this article. FHA loans tend to be more flexible than conventional loans in terms of lending requirements. This also holds true for gift funds as they allow you to receive funds from a relative, close friend, employer, charitable organization or government agency.
FHA guidelines are also less strict when detailing the costs you can cover with gift funds. They allow buyers to cover 100% of the down payment requirements. With an FHA loan, that requirement is a minimum of 3.5% of the home’s price.
Conventional loans: A conventional loan is an umbrella term used to describe a loan backed by a private lender within an amount that conforms to loan limits determined by Fannie Mae or Freddie Mac. With these loans, you can only receive gifts from family, fiancé(e), or domestic partner.
Fannie Mae defines family as “a relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship.” If you have gift funds from an appropriate donor, you can cover all or part of the down payment, in addition to closing costs. Be aware that a minimum 5% contribution by you is needed if:
- he gift amount is less than 20% of the purchase price, and the property is 2-4 unit or a second home
- The loan amount is over $647,200
VA and USDA loans: These loan programs are guaranteed by federal agencies. The Department of Veteran Affairs backs VA loans, and the US Department of Agriculture backs USDA loans. These loans are similar in that they both offer zero down payment options, eliminating the need for gift money in most cases.
However, there are situations where you may need donated funds to close on the loan such as needing funds to cover closing costs. It can also be a situation where an appraiser comes back with a value that’s lower than the sales price. Lenders will only provide financing to cover a percentage of the home’s value, not what you’ve agreed to pay. If there is a difference in that cost, it’s up to you to make it up, possibly with gift funds.
Receiving gift funds isn’t at simple as getting an envelope of cash from your mother. Because of the potential for fraud, lenders are required to ask for and review a mortgage gift letter, among other documents. Your Homebridge Mortgage Loan Originator will provide you with a template that your donor can fill out. It will include space for information such as:
- Phone number
- Bank account number
- Relationship to the homebuyer
- Gift amount
You’ll also need sourcing documents, which, as the name implies, are bank statements that trace the gift money in your account back to its source. You may need to add the following items to that paper trail:
- A bank statement showing the gift money came out of the donor’s account
- A withdrawal receipt from the donor
- A deposit receipt from you
- A statement from your bank showing the money is now credited to your account
Working with the right lender
The rules and regulations around gift funds are only part of what you need to know when you’re getting ready to buy a home. Preparing for what can be a complex loan process, your first step should be to talk to a Mortgage Loan Originator to prepare for a smooth and successful home purchase.
Founded in 1989, Homebridge is a recognized leader in the mortgage industry with a focus on making the dream of homeownership a reality for every customer, every day. When you’re ready to purchase your dream home, contact us. We’re always available to help