If you’re can not pool enough cash for the deposit, a generous relative or friend can help by giving you money.
But the money must be a true gift, not a disguised loan, and it should be documented properly through fiscal reports and a gift letter. When the gift can be a loan that you have to pay back, lenders won’t accept it.
Here’s what you need to learn about applying gift funds toward a down payment.
>>MORE: How much deposit must you purchase a home?
Who can donate
Loans insured by the Federal Housing Administration permit family, friends, your employer or others to give you money as a gift for the down payment. The FHA is “not concerned” with where your gift comes from, based on the Department of Housing and Urban Development, so long as it isn’t from someone who has a stake in your home sale.
The donor can not be somebody who has a financial interest in the sale from the property, like the seller, your real estate agent or your broker.
Your donor accounts for paying taxes on the gift whether it exceeds the exemption limit in one year. The limit for 2017 is $14,000, based on the IRS.
With FHA loans, the entire down payment may come from a gift.
There are no limits towards the amount you could get as a gift, according to Fannie Mae.?If you’re putting down 20% or more on a loan that’s backed by Fannie Mae or?Freddie Mac, it may all originate from a present.
However, if your deposit is under 20%, some of it will be your own money. The exact amount depends on the non-public mortgage insurance company that you’re purchasing insurance from, says?Michele Reen, a home loan loan originator with American Pacific Mortgage in San Jose, California.
The home has to be your primary residence or perhaps a second home, according to Fannie Mae. Gift funds can’t go toward the deposit on investment properties.
Gift funds will go toward additional fees related to your mortgage, including closing costs and, in case your loan requires it, reserves, or?money left over following the loan closes.
The gift letter
Your donor must provide a gift letter that includes the next information:
- Borrower’s name
- Donor’s name, address and phone number
- Donor’s relationship to the borrower
- Gift amount
- A statement that the borrower isn’t likely to pay back the gift
- A statement the donor has no curiosity about the sale from the property
- Property address
- Borrower’s and donor’s signature
Here’s a sample gift letter:
Other required documents
The lender will require a paper trail documenting the transfer of money in the donor’s bank account into yours, or into an escrow account. You’ll likewise need copies of the recent bank statements, your donor’s recent bank statements and cashier’s checks or gift fund wires.
Some home loan programs require documentation of the money leaving the donor’s bank account.
More down payment help
Fannie and Freddie?offer low down payment options, and many lenders offer their own low down payment loans. FHA loans require only 3.5% deposit.
Keep in mind that if you put down less than 20%, you’ll have to pay pmi in most cases, unless you’re getting a Veterans Affairs?loan.
Check out first-time home buyer programs in your state, which might provide down payment assistance in the form of grants or loans.
If you’re seeking online assistance, such as crowdfunding, consider doing the work more than two months before you apply for a home loan since lenders look at only the past 8 weeks of your bank statements.
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