March 1, 2018
March 1, 2018
When purchasing a home, the buyer doesn’t necessarily need to come up with the entire down payment. They can use a gift from an acceptable third-party to provide some or even all of the down payment needed to purchase the home.
There are certain guidelines and requirements connected with using a gift as a down payment on a house. They are fairly standard from one lender to another.
There are four basic mortgage types, and each has their own general requirements on the use of gifts toward the purchase of a home.
FHA Mortgages. These mortgages typically come with a requirement that you make a minimum down payment equal to 3.5% of the purchase price of the home. But FHA guidelines permit you to receive the entire amount of the down payment in the form of a gift. In this way, it is possible to effectively do a zero down payment loan – the mortgage equal to 96.5% of the purchase price, with the balance supplied by a gift. The FHA does not have a specific guideline requiring you, as the occupying borrower, to provide any actual cash minimum for the down payment.
One exception: on an FHA mortgage, the lender may require that you make the entire 3.5% down payment – without a gift – if your credit scores below 620. However, many mortgage lenders will not make FHA loans if your credit scores are that low anyway.
VA Mortgages. These mortgages do not require a down payment. You can literally finance 100% of the purchase price using a VA loan. For this reason, VA mortgages don’t have specific gift guidelines. However, it is always possible to receive gift funds for other purposes connected with the purchase of the home, whatever those might be.
Conventional Mortgages. These mortgages allow you to use gift funds to make a down payment of 20% or more of the purchase price, or if the home you are purchasing is one unit and will be occupied as your primary residence. However, if the down payment is less than 20%, or if the property is 2 to 4 units, conventional mortgages – both Fannie Mae and Freddie Mac – have an “own funds” requirement.
Simply stated, if you’re using gift funds for the purchase of the home, and you’re putting down less than 20%, a minimum of 5% of the purchase price must come from your own funds. (Alternatively, if you are doing a 3% down mortgage, then the entire 3% must come from your own funds).
According to conventional mortgage guidelines, “own funds” is demonstrated by the fact that the money for the down payment is sitting in an account that you own, or that you own jointly with your spouse. It must also be demonstrated that you have owned those funds for at least the past 60 days. This is often referred to as the “seasoning requirement” for bank assets.
The lender will verify this either by requiring that you provide bank statements covering the most recent 60 days or through a verification of deposit form, which will be completed by the bank and include an average balance for the past 60 days.
Any large increases in your bank balance within the past 60 days will need to be documented. That means that you will have to prove that it comes from your own sources, such as another bank account owned by you, the sale of assets owned by you, or compensation from your employer or business.
Jumbo Mortgages. These are mortgages that exceed $424,100 for single-family residences. Jumbo mortgages generally follow the same guidelines that apply to conventional mortgages, though there may be more specific requirements based on each individual lender.
According to FNMA, the donor of your gift must be one of the following if you are applying for a conventional mortgage:
Further, the donor may not be or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction.
Other mortgage types have similar donor relationship requirements.
If you do wish to use a gift as part of the down payment on your new home, there are specific requirements to do so. Those requirements are standard in the industry, and there s typically little flexibility.
The first document required is a gift letter, which is a standard form that is provided by the lender. The gift letter specifies the following:
Next, the lender will look to verify the donor’s availability of funds for the gift, as well as the transfer of the funds.
To do that, sufficient funds to cover the gift are required to be documented, either in the donor’s account or that have already been transferred to the borrower’s account.
Acceptable documentation includes:
If the funds have not been transferred before the settlement, the lender must document that the donor transferred the gift funds to the closing agent. This must be documented with a certified check, a cashier’s check, or other official check.
If you do use gift funds to purchase a home, your donor needs to be aware that there may be tax consequences.
Under IRS guidelines, the donor of a gift may have to pay a gift tax if the amount of the gift exceeds a certain threshold. For 2017, that threshold is $14,000. This is the most that an individual donor can give as a gift without having to pay the tax. However, if the donor is married, the donor and spouse may each give $14,000, for a total of $28,000.
Even if the amount of the gift exceeds these totals, it is still possible to avoid the gift tax. There is a tax form that either the donor or the donor’s accountant can file with the IRS – Form 709, United States Gift Tax Return – that enables the gift amount to be deducted against a very generous lifetime maximum, that exceeds $5 million.
However, in most situations, the gift tax should not be an issue for the donor. That means that a gift is an excellent way for a homebuyer to make a down payment on a house.