Coming up with a down payment or even closing costs is quite the hurdle to many buyers. Even low down payment mortgages like FHA loans, conventional loans, or even adding down payment assistance can be a struggle. Especially, with increasing home prices and buying in large cities. Although, do you know all the ways that down payment gift funds can be used as a home buying strategy? Using a gift for down payment allows a buyer to avoid PMI, cover down payment, use equity to buy from family, pay closing costs, or just plain qualify for a home. Plus, there are other allowed gift donors besides mom and dad! Furthermore, there are gifting requirements for each home loan type. All of which is explained below.
What is a Down Payment Gift?
When it comes to buying a home with gift funds, there are requirements. Understanding the rules up-front and having a conversation with an experienced loan officer is key. Assuming a gift is just a gift may cause issues with your mortgage and potentially income taxes. When it comes using a gift to buy a home,…
- There must be no repayment required
- A down payment gift must be documented per program requirements
- Donor must be an allowed source
How Can a Gift Help Me Qualify for a Home
As discussed, the most popular reason for a gift is covering the down payment. In addition to down payment gift funds, there are other ways it helps buyers qualify.
- Help buyer meet program reserve requirements
- Pay closing costs and pre-paids (first year of homeowners insurance and escrows set up)
- Pay off debts
When it comes to qualifying for a home purchase, there are many boxes to check. One of the main areas includes meeting debt to income ratio requirements. So, borrowers with debts over the limit could use documented gift funds to pay off debts. Furthermore, compensating factors improve chances of loan approval. Asset reserves left over after cash to close is key towards loan approvals. Therefore, using gift funds for closing and keeping the borrower’s funds in the bank could help in creating asset reserves. Thus, a better approval!
Even if a buyer has the down payment covered, there are closing costs. Although the seller is allowed to pay closing costs, it may not work. Gift funds may be used to cover these costs as well.
How to Document a Down Payment Gift
Depending on the loan program, there are certain levels of gift documentation required.
Gift Letter Requirement
Whenever gift funds are involved, a fully completed and signed gift letter must be provided to the lender. Basically, the gift letter states the following…
- Gift amount
- Donor name and contact information
- Recipient name and contact information
- Source of the gift funds
- Specifically state the funds are a gift and not borrowed
- Relationship between gift donor and recipient
Proof of Gift Source
Next, the gift source must be documented. For instance, proving which asset account is the gift coming from? This is accomplished by a copy of a check or funds transfer.
Additionally, FHA and USDA loans require proof that the gift funds were available over the most recent 30 days in the donor’s account. Although, a donor may borrow funds to gift or transfer from one donor account into another prior to transferring to the borrower.
Down Payment Gift Allowed Donor Relationships
Again, the loan program being used determines which donor relationship is allowed. Always, the close family members such as spouse, mother, father, brother, sister, son, or daughter are allowed. But, then it goes further out into areas with defined relationships such as fiance, fiancee, domestic partner, employer, and more. Usually all are allowed. Depending on the home loan type, some relationships need to be further discussed. Primarily, the purpose of the relationship guideline is to ensure an interested party to the purchase transaction is not providing the funds.
Although, there are exceptions to the interested party requirement. For example, the following are allowed…
- Related Realtor gifting his/her real estate commission on the sale
- Family member gifting their equity in the property being sold to the buyer – Called “Gift of Equity”
Using Gift Funds to Avoid PMI
Usually buying a home includes getting the payment to fit within a budget. One portion of the monthly house payment includes mortgage insurance or PMI. Ultimately, the lower the down payment the lower the PMI amount. So to lower or avoid PMI, a higher down payment helps. If a buyer is able to obtain a down payment gift which is 20% of the sales price, PMI is avoided completely. Resulting in a lower house payment.
Your experienced mortgage lender