USING GIFT FUNDS TOWARDS YOUR DOWN PAYMENT
By Jessica Hudson | October 1, 2022
When buying a home, the biggest upfront expense is likely to be the down payment. One way to come up with some or all of the down payment is by receiving a gift of funds. However, before doing this you will want to make sure that your lender will approve using these gift funds towards your down payment. How much can you receive as a gift and who can gift it?
Conventional Loans: For a conventional loan through Fannie Mae or Freddie Mac, the gift must come from family (by blood, marriage, adoption, or legal guardianship). Fiancés and domestic partners also count as family. The donor maybe not be, or have any affiliation with, the builder, the developer, the real estate agents, or any other interested party to the transaction. In most cases, the donor can gift 100% of your down payment. You are, however, required to contribute a minimum of 5% of your own funds if the down payment is less than 20% of the purchase price and the property is either a two- to four-unit principal residence or second home. Gifts on investment properties are not allowed.
FHA Loans: FHA loans define family slightly differently. Cousins, nieces, and nephews don’t count under normal family guidelines, but they do allow gifts from close friends that can include extended family including cousins, nieces, and nephews. FHA also allows gifts from employers, labor unions, and charitable organizations. FHA allows the entire down payment to come from a gift. Like conventional loans, the donor may not be a person or entity with an interest in the sale of the property.
USDA and VA Loans: Even though a down payment is not required on USDA loans or VA loans (in most cases), a gift can be used for 100% of the closing costs or a down payment. The rules are similar to FHA loans where anyone with a relationship to the buyer, apart from interested parties to the transaction, can be the donor.
What documentation do you need for gift funds?
Gift funds must be documented so your lender can confirm the source of the money. When applying for a mortgage, it’s typical for borrowers to provide their lender with copies of personal bank statements for the past 60 days to show proof of assets. If you’re using gift funds to pay some or all of your mortgage costs, your mortgage lender may also request a copy of your donor’s bank statements to verify the outgoing transfer.
Before a lender allows the gift, you’ll also need to furnish a gift letter which states the name, address and phone number of the donor. The letter should clearly identify your relationship to the donor, the amount of the gift, and the date funds were transferred into your account. Most importantly, the gift letter must specify that funds are a gift and not a loan.
The exception is a USDA home loan. This loans does not require a down payment, but you can borrow funds to pay for closing costs. This must be an unsecured loan, however. Keep in mind that your lender will include this debt when calculating your total debt-to-income ratio and determining your qualifying amount.
Can a mortgage gift be repaid?
No. It’s called a mortgage gift for a reason – the gift giver is providing funds to a home buyer with no expectation of being repaid. If the buyer is planning to pay back the funds, that money was loaned not gifted, and then the lender is required to factor that into the debt-to-income ratio.