One of the biggest challenges home buyers face is saving up enough money for a down payment, especially in today’s market when low down payment options are no longer as plentiful. It is not uncommon for buyers to get gifts for use as a down payment. However, it is important to know that there are rules for gifts as down payments.
Parents & Family Members: Both FHA & Conventional loans allow gifts from parents and family members. The gift must be documented by a gift letter that is completed by the donors attesting that the money is a gift and they have the funds needed to gift to you as the borrower.
Paper Trail: In addition to the gift letter, lenders are also going to document actual receipt of the gift. This is done by showing the buyers actually received the gift from the parents through verifying deposit into the buyer’s bank account. Or the gift funds can be wired to the closing directly by the donors.
You still need at least 5% down: Even if you are getting a gift from your parents, you still need to at least five percent of your own funds available for the transaction unless the gift is more than 20% of the purchase price! This is very important. Often times buyers think that if they get a five percent down payment gift from Mom & Dad they are ok. However, both Fannie Mae and Freddie Mac underwriting guidelines require that the borrower still have at least five percent of their own funds in the transaction! Put simply, unless your gift is for more than 20%, you still need to show you have saved at least five percent down on your own.
There are only three exceptions to this rule. The first is if you go with FHA financing you only need 3.5% down and it can come from a gift. The second is if your loan is structured with a second mortgage where the first mortgage does not exceed 80% of the purchase price and you are given a second mortgage for the balance. Second mortgages are very hard to come by these days. The third way is seasoning.
Seasoning: Lenders call possession of assets longer than three month’s as seasoned. This means that if your parents give you a gift in January and you don’t buy a house until June, for all intents and purposes, the money is considered “seasoned” and yours, thus it isn’t considered a gift. This is very important because if the timing is right, you can get around the 5% rule above. Basically, the earlier you actually receive the gift the better. For instance, you plan on buying your home in June of 2010. Lenders typically only will want to see bank statements for the previous three months so March, April, and May. If one of those bank statements shows a large deposit it has to be documented. However, if you get the gift in February, the deposit does not show on the next statements and the money is considered seasoned and thus not a gift.
As you are getting your financial ducks in a row to buy a home, it is important that you sit down with a qualified mortgage professional to really understand the ins and outs of your situation. If you have any questions, do not hesitate to give me a call.
