Has your family member or someone close to you offered to help with your down payment or closing costs? This is becoming an increasingly popular way for home buyers to receive assistance. However, there is more to the process than just receiving the funds. We will dive deeper into the process of receiving gift funds and what you will need to do to communicate this with the lender.
How the Process of Gift Funds Works
Your lender will need some specific details regarding these funds before they can be accepted.
When you have decided to use gift funds for your down payment it is important to notify the lender or broker. Once they are notified a gift letter will need to be completed. Some lenders already have a letter template that can be requested and returned to them. The lender will need to verify the funds in one of these ways:
· A copy of the borrower’s deposit slip and the donor’s check or withdrawal slip
· Donor’s bank statements to verify the funds are available.
· Lender can confirm receipt of gift funds from the closing agent in the form of cashier’s check, certified check or another official check.
· A copy of the settlement statement showing the gift was deposited.
One key thing to remember is you can not pay back a mortgage gift. If the donor is expecting payback the lender will consider it a loan, which can cause problems when calculating debt-to-income ratio. It is important to be clear about the source of funds.
Who Can Give a Gift?
According to Fannie May and Freddie Mac guidelines for acceptable donors are defined as:
· A relative, borrower’s spouse, child or other dependent
· Any other individual who is related to the borrower by blood, marriage, adoption or legal guardianship
· A fiancé, fiancée or domestic partner.
How Much Can be Given for a Gift?
Most times there is no limit that can be gifted for purchasing primary properties. For secondary properties you will have to pay at least 5 % of the down payment. Gift funds will not be accepted for investment properties.
These guidelines are loan specific so it is important to always check with your Loan Officer to clarify which type of loan program you are financing.
Tax Implications for Gifts
It is always important to reach out to a Tax Advisor or CPA with any questions regarding gift tax amounts and clarification on tax penalties for gifted funds.
Gift funds make it easier to help home buyers afford their homes and many family members are willing to help. It is important to talk with your lender/ broker about what is needed for gift funds and realizing the impact of gift funds on the home buying process.