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Featuring Guest Author: Ron Gomez, Loan Officer
Using Gift Money for a Down Payment
Are you in the process of buying a home with a mortgage and just received gift money to put towards a down payment? Whoever it may be that gifted you the extra cash, know that it can be a huge step in achieving homeownership.
We understand that most people are not always open to accepting gift money from others as we respect that decision. However, if you happen to be low on cash or have money saved for other high-priority expenses, using gift money can help you cross that financial hurdle and finally buy the home you desire.
The purpose of this piece is to show you how using gift money works when obtaining a mortgage and how it differs across different loan programs and property types.
Who Can Provide Gift Money?
Other than having an extra source of cash to help you with the biggest purchase of your life, using gift money can benefit you in several ways. One thing to note is who exactly can provide gift money. Some may think that anyone can provide this financial support when in reality, there may be limitations.
Fannie Mae’s guideline allows gift money to come from relatives. A relative is defined as the borrower’s spouse, child, or other dependent, or by another individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or a fiancé, fiancée, or domestic partner.
Depending on the loan program you choose, gifts may also be accepted from non-relatives, such as a close family friend. In the end, make sure that whoever is providing the gift money is someone you trust and are close to, possibly avoiding any relationship conflicts later down the road.
How Does Using Gift Money Work?
Often the largest hurdle that today’s homebuyers, particularly millennials and first-time buyers, face is saving enough funds for a down payment on a home. This can be particularly difficult as many potential borrowers have to deal with rising rents and student loan payments, along with life’s everyday financial considerations.
For many, the use of gift funds is the quickest path to homeownership.
Even if a borrower has some funds to work with, a challenge may be having the 20% down payment required to avoid mortgage insurance on a conventional loan. Many people can overcome this challenge by utilizing gift funds or by utilizing other loan options that allow a more flexible down payment requirement than the typical 20%. In many cases, gift funds can be a helpful tool in the structuring of a loan.
It is important to note that they are usually required to come from a relative or possibly a fiancé. Ineligible sources of gift funds are interested parties to the transaction, such as a seller, realtor, or broker.
A vital piece of the puzzle is the requirement of a gift letter, this is a formal document that must contain the following information:
- Borrower’s name
- Donor’s name and contact info
- Donor’s relationship to the borrower
- Gift amount
- Address of property being purchased
Keep in mind that all parties must sign the gift letter. The letter should also state no repayment is expected or required for the gift as it is illegal in most cases.
The funds should be properly documented through financial records. Depending on the loan type, more documentation may be required. Every loan type has specific rules regarding this. For every gift, the funds must be documented, typically through bank statements of the borrower and potentially the donor too. The funds must be paper trailed, as the lender wants to ensure the donor is not putting themselves in financial hardship when donating towards the purchase of a borrower’s home.
Can You Use Gift Money for Any Loan Program?
Depending on which loan program you opt-in for, there are different requirements for using gift money, which you should educate yourself on before using your gift money. Here are some of the requirements with the most popular loan programs:
If you are looking at a 20% down payment, a gift for the entire amount is usually acceptable. Fannie Mae will allow 100% of gift funds with no portion contributed by the borrower. Learn more about conventional loans.
The minimum required down for an FHA loan is 3.5%, all of which can come from a gift. Learn more about FHA loans.
For those who meet the requirements for a VA loan, it may be possible no down payment is required. Gift funds are also allowed for the down payment and closing costs. Learn more about VA loans.
Whichever loan program you use, it is always important to check with your loan officer, regarding any scenario which may potentially involve gift funds. They will have a better idea of what requirements you and the donor should be aware of, to avoid any potential surprises down the line.
Requirements for these loan programs are subject to change at any time, so we highly recommend that you research on your part to ensure the information you read fits your situation at that time.
Are There Limits on Gift Amounts?
Generally, there is no limit on the gift amount provided to a borrower by a donor. However, there may be restrictions depending on what type of property you are buying.
For Conventional loans, gifts are acceptable for primary residences and second homes.
For FHA loans, gifts are only acceptable for primary residences.
In both cases, gift funds are not permitted for the purchase of an investment property. Again, always ask your mortgage lender if gift money is acceptable with the loan program you choose.
Contributing to the American Dream of Homeownership
Ron Gomez, an experienced loan officer based out of Riverside, California, has worked with several borrowers who leveraged gift money from family members. According to Ron, it became a huge advantage in reaching their financial goals.
Throughout the years, I have assisted many buyers who have used gift funds to purchase their homes. It is always great to see family members help one another. In most cases, it was the only avenue available for borrowers who would have otherwise had to put their dream of homeownership on hold.
Evident from his years of extensive experience, Ron knows the value of using gift money from family members and how it can be that final push to homeownership that wouldn’t be possible without it.
You’re On Your Way to Homeownership…
The road to homeownership is never a clear path. Borrowers will usually face sudden hurdles or obstacles that can quickly turn them away from their financial goals. If one of those hurdles is not having enough saved for a down payment on your desired house, don’t be afraid to ask your family members for help. Even if you think that you can wait a few years to save up, sometimes that shining moment to buy a home should be grasped right away and not slip from your fingers.
If you are having trouble attaining a pre-approval, consider a cosigner on your mortgage to help you with the process. Overall, obtaining help doesn’t have to be shameful, rather think of it as a support in getting to where you need to be. If you’re ready to apply for your mortgage, find a local loan officer to discuss your homeownership goals and get started on your journey!
About the Guest Author
Representing the inland empire and beyond, Ron has built a career on assisting individuals and families realize their financial goals through wise mortgage strategies. Ron is known for his caring, creative and optimistic nature; matching clients with the right loan products best suited for their financial goals. He has committed over 25 years to help people purchase and refinance homes for their families. He understands the concerns around uncertainty and commitment in the home loan process and is committed to uncommon transparency, with a goal of achieving fast and uncommon trust with each client he serves. His clients have recognized him for his attentiveness and service, as he acknowledges his role as trusted mortgage advisor; understanding each client’s needs and goals are unique to their individual situation. Learn more.
Financing details are for educational purposes only. All views and opinions do not constitute financial or legal advice and reflect requirements at the time of publication. Rates, program terms, fees, and conditions referenced are subject to change without notice. Not all products are available in all states for all amounts. All mortgage applications are subject to underwriting guidelines and approval. This is not an offer of credit or a commitment to lend. Residential Wholesale Mortgage, Inc. dba RWM Home Loans is an equal housing lender licensed by the CA Department of Real Estate #01174642 and CA Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act. NMLS# 79445