When it comes to buying a Houston home, the greatest obstacle for most individuals is saving for the down payment. And most of us know that, with lower interest rates and mortgage payments and no private mortgage insurance to pay for, the sooner you can pay off, the better off you’ll be. But for most of us, saving almost 20 percent of the purchase price is nearly impossible. There is, however, another option: making a family member contribute the down payment to you. But in this situation, there is a strict set of guidelines you have to obey. To find out what homebuyers need to do about getting a down payment as a gift, read on.
Overview of Down Payment as a Gift
It’s not normal, but when they can’t come up with it themselves, homebuyers often use the cash they have got as a gift for the down payment. And what’s much less well known is that this gift must be reported and revealed to your lender.
From the viewpoint of your lender, it’s not enough that you have the down payment ready at closing. You have to let your lender know that you are using a down payment as a gift.
“While lenders allow gift funds, they also require the source of these funds to be disclosed by mortgage applicants. Note, the lender wants a good image of your financial condition when applying for a mortgage loan. This includes your employment, wages, and assets details. This is why copies of the most recent bank statements would be demanded by a lender. The goal of reviewing your bank statements is to ensure that you have adequate funds for mortgage spending.”
Who Can Gift a Down Payment?
There are also limits on who can send a down payment as a gift and who can accept one from Houston homebuyers. Such limitations vary by borrower and according to the loan / mortgage program.
Many services only authorize down payment gifts from a blood relative. Others often authorize a godparent to offer certain gifts, and still others have charitable organizations or non-blood relatives.
When it comes to the form of loan, here’s what’s permitted as to who can offer a downpayment as a gift:
- Conventional Loan (Fannie Mae and Freddie Mac)-Only relatives, including “by blood , marriage, adoption, or legal guardianship,” as well as finances and domestic partners
- FHA Loan-Family (with the exception of cousins, nieces and nephews), close friends (which may include cousins, nieces and nephews) and “employers, labor unions and charities”
- USDA and VA Loan- You have a relationship with someone, but they may not be an interested party (someone involved in “the home buying transaction”)
You Must Document the Money and Have a Gift Letter
The key thing homebuyers need to bear in mind about getting a down payment as a gift is that they have to log the money and have a gift letter.
Documentation criteria for lenders (unless it is ‘seasoned’ money) usually include:
- Bank statements
- Copy of check and deposit slip
- Copy of the gift-givers check
- Proof of wire transfer
- Copy of the settlement declaration showing the deposit of the gift
Before you can use the money for a down payment, the lender would also ask you to send a gift note. “This letter’s aim is to show your relationship with the gift giver and that the funds are a gift and there is no need for repayment.”
There are common elements in these gift letters, but be sure to consult with your lender to be certain. A template that you can use to make sure you get it correct might be given by your lender. Consulting your agent about this is also a smart idea.
Can a Down Payment Gift Be Repaid?
As a homebuyer, another thing you need to remember about a down payment as a gift is that it can not be repaid. It must be a gift in its entirety. Here’s the reason.
“If the buyer plans to pay back the cash, the money has not been loaned, and so the lender is forced to take that into account in the debt-to – income ratio. This is to make sure you can genuinely afford to pay for your mortgage. Withholding data about your downpayment sources could jeopardize your loan qualification, and more importantly, it is considered illegal mortgage fraud.”
Honesty is paramount for the contributed down payment.
Use Your Agent
As you can see, then, there are some very stringent criteria when it comes to a gifted down payment. It is quick to muck things up and potentially run afoul of the law only by inadvertence. For Houston homebuyers, the best course here is to let their local real estate agent safely direct them through the process. If you intend to use a down payment as a gift, please contact us today to make sure you’re getting it right.