Despite being able to afford the monthly mortgage payments, occasionally potential buyers avoid a home purchase because they lack the funds for a down payment. Many home buyers struggle scrapping up money for a down payment – which is why oftentimes a charitable family member or close friend offer up their help in the form of a gift fund.
Who can donate a gift fund?
A gift from an eligible source can give you that extra push into your dream home, and that’s why it isn’t uncommon for home buyers to receive gift funds. There are a few rules and guidelines that apply to gift funds – specifically who is allowed to give them. Depending on the type of mortgage you choose, the most common sources include:
• Relatives
• Close friends
• Employers
• Charitable organizations
• Government agencies
• Public entities that assist low-income/ first-time home buyers
The gift donor cannot be a person with an interest in the sale of the property including:
• the seller
• real estate agent
• broker
• builder
• any other associated person
What is a gift letter?
So, you have a gift fund donor, that’s great! However, gift funds must be documented so your lender can confirm the source of the money – this is in order to ensure that this money is a true gift and not a loan in disguise which can affect your DTI (debt-to-income ratio).
Your donor must send your lender a mortgage gift lender accompanied by a “paper trail” to back it up.
• The dollar amount of the gift
• The date the funds were transferred
• A statement that no repayment is expected
• The donor’s name, address, phone number, and relationship to the borrower
The accompanying paper trail should include a copy of the donor’s withdrawal and borrower’s deposit slips – or something similar.
How much can be donated?
The amount of money you’re allowed to receive as a gift depends on the type of mortgage you’re borrowing. Some mortgage programs limit the amount that can be used towards a down payment, closing costs, and other fees. Gift funds can only be used on primary homes and second homes, not investment properties.
• Conventional Loans – all of your down payment may be gifted if you’re putting down 20% or more. If you’re putting down less than that, part of the money can be a gift but 5% must come out of your own pocket.
• FHA or VA Loans – entire down payment can be gifted unless your credit score is below the minimum of 620.
More options for down payment assistance?
If you are unable to receive a gift fund – that’s okay, there are other forms of down payment assistance that are available to home buyers. Talk to an expert today to see if you qualify for down payment assistance.
This is not financial management advice. Please consult your financial advisor for financial management advice. The included content is intended for informational purposes only and should not be relied upon as professional advice. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Prepared 4/09/2019.