Buying a home is the American dream for many and there are a lot of programs available to accomplish this dream. But what happens when the buyer needs a little extra funds in order to purchase? That is where a gift can be very beneficial. Although it is important to understand gift requirements such as the gift letter, who may be the donor, and verification of the funds. Overall, there are several ways a gift may help a buyer and we will explain how the gift process works.
Reasons for a gift on a purchase:
- Down payment
- Cover closing costs
- Pay off debts to qualify
- Avoiding PMI
So as you can tell, gift funds may help a buyer get into a house in a big way! Although, the most common use for a gift is for down payment. Let’s explore how it works!
Who Can Give a Gift to a Buyer?
You may wonder “Why is it so important who gives the money?” or “Does it have to be a family member?”. Foremost, a gift should truly be a gift. That means the money should not be a loan in any way. Plus, the party giving the funds should not be the seller, but doesn’t always have to be a family member. The exception to this rule involving the seller would be in the case of a gift of equity where the seller is a family member.
Each loan type varies slightly in who may provide the gift. So, here are allowed donors for FHA and Fannie Mae conventional loans.
FHA: Borrower’s family member, employer or labor union, close friend with clearly defined and documented interest to the borrower, charitable organization, government agency or public entity that has a program for homeownership assistance to low or moderate income families, and even the Realtor on the transaction that is a family member.
Fannie Mae: A relative defined as borrower’s spouse, child, or other dependent, or other individual related to the borrower by blood, marriage, adoption, legal guardianship, fiancé, fiancée, domestic partner. Gifts are not allowed on rental property purchases.
Gift Letter Template
When a gift is being used, there is specific language required in a gift letter. That is why it is best to use a template instead of free writing one. The gift letter must clearly state the donor’s name, address, phone number, relation to the borrower, amount of the gift, plus the source. Additionally, the letter must specifically state that the funds are not a loan. There are several other common items included which you can find on the form in the link below.
Click here to download gift letter template
Mortgage Gift Required Documentation
If you have decided to use a gift for a purchase it is important to remember that there are rules and documentation requirements. First of all, DO NOT just get the funds from someone prior to speaking to the lender as it could cause issues or at least more paperwork. For instance, often a gift is given as cash. Cash is normally not traceable to who gave it, so it cannot be used. Depending on the loan type, there are some variations of the requirements.
FHA Gift Documentation Requirements:
An important FHA requirement is documenting the funds actually came from the donor’s account. Additionally, FHA requires lenders to verify the donor had the ability to provide the funds. So the donor can’t just put $5000 in a bank account and the next day gift $5000 without proving where the funds came from. If utilizing an FHA loan and a gift, then it is important to make sure the donor is aware of this as sometimes a donor doesn’t want to provide a bank statement.
What is the Gift Limit?
The IRS defines a gift as “Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”. As far as a mortgage is concerned, gifts are often allowed towards the areas mentioned earlier in this article. But it is important to know how the IRS treats a gift specific to a borrower and donor transaction. Furthermore, it is highly recommended to discuss the gift with your CPA or tax professional. Additionally, there could be tax strategies which can aid in the purchase.
The 2017 Gift Exclusion is $14,000. But, spouses may actually double the gift to a person. So spouses may gift up to $28,000 to a single person. Check out the IRS rules on gifts here.
No Gift Available? Use Down Payment Assistance
Obviously, not everyone has a relative that can provide a gift. So if 100% financing isn’t available through VA or USDA, then what options are there? That is where down payment assistance comes into play. Down payment assistance bridges the gap between the sales price and the loan amount. Great examples of DPA programs include NC Housing and SC Housing Finance Agencies. These agencies offer low to no interest loans to help NC and SC residents become homeowners.