Gift funds can be a helpful way to make a down payment on a home, but there are specific rules and requirements that must be followed in order to use them properly.
Transcript
Ryan Hillard: Hi, this is Ryan Hillard with the Ford Mortgage Group, and today I want to talk to you about the do’s and don’ts of using gift funds to help with the down payment.
Why Gift Funds Are Helpful
Ryan Hillard: When buying a home, the biggest upfront cost is most likely going to be the down payment, where even if you can afford the monthly mortgage payments, the initial cost may be too much for you to do on your own.
According to the National Association of Realtors, in 2019, 60% of home buyers came up with their down payments primarily from their own funds. But this is not always attainable, especially for first-time, time home buyers who may not have the benefit of funds from the sale of their current residents.
That’s where gift funds for a down payment are helpful. Family members or close relatives who wanna chip in and help the home buyer purchase a home are able to do so. The great news is that you can use these gifted funds to make the down payment. Your lender will also want to know some additional details before they allow you to use it.
Who Can Give You Money for Your Down Payment
Ryan Hillard: There are only two specific groups that can give a home buyer money to fund the down payment, and those are one – either friend or a family member as long as they can prove a standing relationship with the buyer. And two – a government agency as part of a program meant to get first-time home buyers into the market.
In either case, you must confirm the relationship between the donor and the recipient. If you plan on getting gift funds from a friend or family member, you will need a gift letter confirming the relationship to the giver, along with some additional details. The letter must also indicate that the money is a gift and that there is no expectation of repayment.
Evidence Needed
Ryan Hillard: Usually, this letter will be provided by the lender, so feel free to reach out to them to get it, and then it will need to be signed by both parties. The lender may also require evidence of the gift, depending on the loan program and how the funds are transferred. For example, if it’s a conventional loan and the funds have been deposited in the borrower’s account, the lender will want to see the gift-givers bank statements to show that there are sufficient funds to make that gift.
They may also ask for a bank slip or an updated account statement from the recipient to show that the funds have been transferred and are available. If the gift funds are sent to the title company ahead of closing, the donor’s bank statements are not typically needed, but the gift letter will still be required.
In this case, the lender will need to confirm that the funds have been received prior to providing the final approval for the loan. So please be sure to get the funds sent in well ahead of time to prevent any delays.
Repayment
Ryan Hillard: Now, one popular question is if, if a buyer can pay back a mortgage gift, and the answer here is no.
This is considered mortgage or loan fraud, which is a crime. If there’s an indication that you do intend to pay back the gift, it can put your loan qualification at risk. If you’re paying it back, then the gift would be considered a loan, and all loans need to be factored into your debt-to-income ratio. Next, let’s talk about seasoning for the fines.
Seasoning
Ryan Hillard: If possible, it’s a good idea to ensure that gift money is seasoned when it comes time to use it as a down payment. Your lender will want proof that the funds have been in your, in the buyer’s account, for a substantial amount of time to show that the buyer hasn’t just gathered a bunch of cash on a short-term basis.
Ultimately, the cost of the down payment is only one expense to consider in the home buying process, and the home buyer will also have other expenses to pay, which would include closing costs for appraisal, credit title insurance, uh, any underwriting fees, and then establishing the escrow account for homeowner’s insurance and property taxes as well.
Dos and Don’ts of Getting a Down Payment Gift
Ryan Hillard: Now, I hope that overview has been helpful, but before we wrap up, I want to provide a recap of the dos and don’ts of getting a down payment gift. To start off with, you do want to get a signed statement from the gift giver, but you do not want to tell the lender that the funds are a gift when it’s actually a loan.
You do want to remind the gift giver to provide a paper trail or keep that paper trail, but you do not want to change or add any money that you cannot explain. Do get the money in advance and know how seasoned money works. Do not assume that all types of loans will allow for the down payment gift. Do talk to your lender about any more specific requirements they may have. When you speak to your lender about which loan program is best for you, be sure to let them know upfront that you plan on using gift funds for the down payment. Some loan programs have strict guidelines about how much money you can use for the down payment and also who can gift you the money. If you’re in the market for a new home and want a little help, don’t hesitate.
Just make sure to follow the advice of your lender and ensure that you accept such a gift in the proper manner. Thanks for watching.
