So, you have contemplated thinking about maybe possibly looking into the option of considering potentially purchasing a house, sorta kinda…. Maybe. Usually in instances such as this, the potential home buyer delays for one major reason – the down payment. We have written a few articles speaking about different options for programs available to many families. One about general programs available, and another about programs specific to Central Florida. However, we wanted to discuss one option that does not originate with your lender or the government – receiving a down payment gift. Some families may not have this option available to them, but for those that do, this article is for you!

So, you and your partner have both worked on your credit, and you both have worked on your career’s. You both have done the work and believe you can make the shift from renter to homeowner financially. But, you are caught in a catch-22, because even though you can afford the monthly mortgage payment, you cannot seem to save enough money for the down payment. On top of that, your rent seems to go up every time your pay increases. You can find scores of articles and books detailing how to go about saving money. However, if you have the ability to receive a down payment gift, to have someone pay it for you…. Instead of waiting potentially years, why not at least explore that option and educate yourselves on that topic.

Many people do not even realize this option exists. Yes, you absolutely have the option of asking someone else to pay your down payment for you. This option does have guidelines and restrictions, for reasons we will explore later, but the option does exist. To help clarify the option, we will discuss the different loan types and how each utilizes a down payment gift. Then we will extrapolate on the guidelines and restrictions. The constant caveat throughout though – no two lenders operate the same, or work with the same programs. Each also will have their own underwriting process and guidelines. In other words, verify everything with your lender!

Loan Types

First Time Home Buyers tend to make up a large portion of buyers that will utilize a down payment gift. Many of these buyers take advantage of the Federal Housing Administration (FHA) program, for a myriad of reasons. So we will cover this loan type first. We follow it with the US Department of Agriculture (USDA) and Veteran Affairs (VA) programs. Finally, we close with conventional loan types. Lenders have other loan options available, however this will cover a vast majority of them. Regardless of the loan type, one requirement across the board says you cannot purchase the property as an investment. You can utilize a down payment gift only on a primary residence or second home.

Another common factor for multiple loan types; the magic number for your credit score seems to come out to 620. The entire down payment can be gifted unless the credit score is below that minimum threshold. In that scenario, the home buyer will have to pay for some or all of the down payment.

FHA

The typical FHA consumer makes a 3.5% down payment on a home. So on a $100,000 purchase price, the down payment required by FHA, called the required “minimum investment,” comes up to $3,500. According to FHA, this minimum investment ensures the home buyer has “skin in the game” which lowers the risk of foreclosure. FHA allows a financial gift to cover any or all of the 3.5% minimum investment. Families do not need to contribute their own money if receiving a gift for the full 3.5% down payment. FHA also allows a financial gift to cover any and all closing costs as well.

VA / USDA

Because both the VA and USDA loan programs require no down payment, using gifts does not happen as often.  Typically only if the potential home buyer requires funds for closing costs. USDA loans allow the use of gift funds to cover any down payment required or closing costs not already covered by the seller. Likewise,VA loans allow gifts for the same purposes. And both programs follow the same donor guidelines and documentation procedures as conventional loans, discussed next.

Conventional

Conventional loans backed by Fannie Mae and Freddie Mac allow the borrower to apply financial gifts to the down payment, fees, and closing costs. Although not true years ago, in most cases now, the only time a family will need to contribute any of their own money includes when the loan amount exceeds $424,100. So long as the gift amount covers all fees, the down payment, and closing costs, the buyer needs to contribute nothing out of pocket.

Restrictions

As with all things, gifts covering down payments, closing costs, and other fees comes with stipulations, restrictions, and requirements. We will outline them here, and once you see them you will understand their reasoning and need..

Who Can Provide A Down Payment Gift

Typically, only relatives of some sort can donate a financial gift toward the purchase of a house. According to Fannie Mae’s underwriting guide, only “a relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship” can donate. In addition, a fiancé or domestic partner can give a gift towards the purchase of a house.  FHA has other options, explains Tim Lucas below:

“FHA expands the rules a bit, allowing an employer, charitable organization or government agency to contribute. There’s even a provision for a friend to give a gift, provided a documented, long-term relationship was in existence prior to the real estate transaction. An example would be a high school yearbook, a family photo album, or proof of being roommates in college. This is the kind of real-life documentation the underwriter might ask for when receiving a financial gift from a friend.” (http://mymortgageinsider.com/first-time-home-buyers-down-payment-gift-money/)

What A Down Payment Gift Can Look Like

The main concern any lender will have when working with a buyer who wants to use a gift for their down payment includes whether or not the money has a repayment requirement.  As a loan, the lender will need to take into account the additional payment when calculating the monthly payment. They also need to adjust the debt ratio after adding in the additional loan. The extra payment every month will lower the amount available to spend on a mortgage each month, and therefore lower how much house you can afford.  To try and eliminate any funny business, the lender will require a few things, as explained below.

Letter

The lender will require a letter, written and signed by both the party giving the gift, and the party receiving the gift.  As with everything in the article, confirm with your particular lender what they require in the letter. But at the very least the letter will need to contain:

• The amount of the gift
• The property address
• The relationship of the parties
• A statement that the money is actually a gift and not a loan and has no required repayment

Source Of The Down Payment Gift

Finally, the last requirement for utilizing a down payment gift – the source.  The lender will want to know exactly where the gift came from.  Which means, the party providing the gift will likely have to provide bank statements and a paper trail.  The bank statements will need to show where the money came from. Salaried income deposits, liquidation of stocks, or some other (legal) source. The paper trail will need to show how they transferred the money. Usually a check, personal or bank, or wire transfer.  Check with the lender to find out their preference, as some prefer the check paper trail over the wire transfer.

Tax Implications

One final thought on a down payment gift – speak with an accountant, or tax attorney about the possible tax implications.  These transactions happen so often that the concern does not stem from the actual gift. However, you still want to know how receiving it or providing it may affect your individual tax situation..

Summary

With a few guidelines to follow, a potential first time home buyer can have someone help them purchase their first home using a down payment gift.  This gift can cover not just the down payment in many cases, but also the closing costs and other fees.  For those buyers that have the ability, this option may allow you to purchase your first home much sooner.  This will in turn allow you the ability to start building equity in your new home potentially years earlier. A couple things to remember:

• Most loan types will require a 620 credit score to receive a down payment gift
• Can cover the entire down payment, and in many cases the closing costs and other fees
• Will need to come from a relative in most cases
• Cannot have any repayment requirements, with a signed letter proving it
• The lender must “source” the money, and will need to see a paper trail of where it originated
• Could have tax implications

Ask us how we can help you get into your #dreamhome!

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