You want to buy a house, but you might not have quite enough money saved for a down payment and closing costs. There are alternative sources to down payment money to buy a house. One of which is using gift funds. Gift funds can be used for a down payment and/or closing costs.
Home ownership can be closer to you than think if you have saved a little money and you have someone willing to gift you the money to help with your purchase.
Right now there are a ton of low money down programs where you need 3-5% as a down payment that allow the use of gift funds to help complete your purchase.
What Do You Need To Know About Gift Funds?
Gifts funds in the mortgage world is money gifted to a borrower to put towards a home purchase.
The key word is gift. The money cannot be borrowed.
Why does the bank care how you get the money? The reason the money needs to be a gift is the bank does not want you to “borrow” and have to make payments just to get the down payment money to purchase a home.
In the not so distant past, most banks wanted to see you have 3-5% of your own money put into the purchase. It showed the bank you had the ability to save.
But today, many loan programs allow 100% of your down payment and closing costs to be gift funds.
A borrower getting a mortgage that is backed by Fannie Mae, Freddie Mac or the FHA a 100% of your money to close can be gift funds from an acceptable donor. The gift money can be used for your down payment, your buyer closing costs or required reserve funds.
If you are buying a single family home or a condominium many programs will allow 100% of the cash needed to close to be gift funds. Multi families may require 5% of the funds be your own.
With Fannie Mae and Freddie Mac the gift funds can only come from a relative, whether by blood or marriage.
But FHA states the gift can come from a close personal friend with a documented interest in the borrower. Gift funds with an FHA loan can also be from a charitable organization, an employer or union or a down payment assistance program.
So the FHA is a little more lenient about where the gift money is coming from.
It is important that when your mortgage broker asks how much down payment money you have available, you differentiate between money you have personally saved and money that is being gifted to you.
To you, it doesn’t make a difference, money is money. But to a bank it does. They view money you saved differently than gift funds. They will want documentation of who is giving you the money and paper trail of where your money is coming from.
There still may be loan programs that require a certain percentage of down payment money is saved by you. So when you are getting pre-approved for a home loan make sure you broker knows if part of the down payment is being gifted or not.
Getting your first mortgage can be a whirlwind to begin with, and leaving out small details can cause problems later on when it is crunch time.
Now that you read this please don’t just go shuffling your money around. The banks are very strict about sourcing where the money comes from. Going off half cocked can create a lot of issues with your mortgage pre-approval.
If your parents or another approved gift donor has given you gift money in advance of a purchase, the easiest thing is to let the money season in the bank account. Seasoned funds are money that has sat in the bank account for over two months.
Meaning you can show two months of bank statements showing the full amount has been sitting in the bank account.
Seasoned funds are considered your money and will not require sourcing even though it is technically a gift.
Unfortunately, not every home buyer has time to season funds or the money won’t be moved until a home is actually under contract. So if you have not seasoned your down payment gift funds you will have to show the paper trail of where the money is coming from to where it ends up.
Speak with your mortgage originator and get precisely what the underwriter will be looking for when it comes time to document gift funds. I have only given you an overview and every underwriter is different in what they may require.
Another requirement the underwriter will be looking for is a “Gift Funds Letter” the letter should state:
Gifts must be evidenced by a letter signed by the donor, called a gift letter. The gift letter must:
In no means am I an accountant and if you have concerns of a tax consequence certainly speak to your accountant first.
But as I understand it in 2018 a person can gift up to $15,000 to a person in a year. So a set of married parents could gift $30,000 to a single child, or $60,000 to a married couple with no tax consequences.
Certainly enough money can be gifted for a down payment, tax free, to get your child or children into their first home.
With today’s underwriting guidelines, it is very possible to have a parent or family member give you gift funds to help fund your down payment and closing costs when purchasing a house.
If you are receiving gift funds for your down payment discuss with your mortgage originator immediately. Most of the loan programs allowing gift funds have very stringent criteria and documentation and you don’t want to run around last minute trying to pull it together.
By all means consider gift funds as a means of supplementing your down payment for a house purchase.
was provided by Kevin Vitali of EXIT Group One Real Estate. Kevin Vitali is a Tewksbury MA REALTOR® that services northern Middlesex county as well as Essex county in Massachusetts. Call for your Home Buying Consultation…completely free and no obligation.