2022 Down Payment Gift Requirements For All Loans

Certified Mortgage Advisor
NMLS 1701021
Published 
March 5, 2022

Why buyers as for down payment gifts

Now, I'm going to show you how gifts work for a down payment and closing costs to buy a home. So for a lot of people saving for a down payment and closing costs is really difficult. As homes continue to increase in costs, so does the down payment as well. So there are a good amount of people who then rely on their family sometimes outside of the family to help them with the down payment and closing costs with a gift.

How down payment gift works

What the way gifts works are someone gives money to somebody purchasing a home without the expectation that is going to be repaid. So it's a gift it's not a loan.

What I can do to ease your frustration when choosing a gift

What I want to do is I want to help you see all the requirements. Because gifts can be actually really frustrating in the mortgage process. There's gonna be a lot going on when you look to buy a house. And if you're looking at using a gift, people just start moving money around and it creates so much frustration for people. So I want to guide you through the best way to do this, that way you have as little frustration as possible when you are choosing to use a gift.

What is a Gift Letter?

So this is a high-level overview of how this works. So we first have a gift letter, and I'm going to show you a little bit more about the gift letter here in the next slide, but what a gift letter does is it basically says somebody is willing to give you money to buy a home for the dental payment closing costs either and they don't expect to be repaid. This is something that the lender is going to give to you.

Do this the right way

From there, what then ends up happening is there's going to be a transfer of money from the donor to the person buying the home, or there are several different ways. This can actually happen in this is where it gets messed up. You need to do this the right way.

People often just wanna start moving money around and it creates so much stress because there's a lot more documentation that can be required. And it just adds an extra kind of hurdles to the process that you don't really want to have to deal with.

The gift flow

So I'm going to show you the right way to do this. So we go from a gift transfer funds happens, and then that is money that you can use as a down payment closing costs that you aren't paying back.

The Gift Letter

So gift letter all this is usually just a one-page document that you're going to get from your loan officer. So you don't have to make this on your own. You're going to get this from your loan officer.

What a gift letter should have

This is what it needs to have. That's going to have the name of the donor, who's giving you the money, their address, their phone number, their relationship to you. I'll show you who is eligible as a donor, and who's not. Also, the gift amount that they're giving you.

How much amount can be gifted

Most of the time, the gift amount tends to be whatever the minimum down payment is. So for commercial loans, 3% for first-time homebuyers, FHA loans, it's 3.5%. VA and USDA don't require a down payment, but sometimes closing costs are gifted and there as well. So usually I see it around the minimum down payment, however, you really can gift with most loan programs, any amount that you'd like.

Conventional - Fannie Mae

It also has to say that there is no expectation of repayment. And then most of the time you need to also show in the date of the transfer of that money as well. I'm gonna walk you through a conventional, FHA, VA, and USDA, all those different loan types and their requirements here. So you don't run into any frustrations when you do get a gift with these loans.

Who can give you a down payment gift?

First of all, who is an eligible donor? So who can actually give you money? This can trip up a lot of people because it's not just anyone. It can't just be a friend. It can't just be somebody who said, Hey, I'll give you some money, that doesn't really work.

And also if you have any more of these friends, let me know. I'd love to talk with them. So eligible donors, you can, it can be a borrower, spouse, child, or another dependent, or any individual who is related to the borrower by blood marriage, adoption or legal guardianship, fiancé, domestic partner and it cannot be, or have any affiliation with an interested party in the transaction. Basically what that means is it can't be the seller. Can't be the real estate agent. They cannot give you a gift to buy your home. 

It should be your primary residence

Also, this does have to be on a primary residence or secondary residence, so you can not get a gift on an investment property.

Must put 5% down from your pocket

If you're buying a home that it's two to four units, that's a primary residence. You need at least 5% down of your own, and they can get a gift on top of that. If it's a secondary home, that's less than 20% down, you also need to put 5% of your own money down. So for most people, that's a very unique situation. That's probably not going to matter that much.

Documentation

So for documentation, there are four different kinds of documentation, so it can be one of the following. So documentation can either be a copy of the donor's check or the borrower's deposit. Copy of the donor's withdrawal, slip, and borrowers deposit slip a copy of the donor's check to the closing agent, or the best option, a settlement statement showing receipt of the donor's check.

So for settlement statement showing receipt of the donor's check, what we don't want to do or when you're getting a loan, you want to give the underwriter the minimum amount of documents possible because documents that they see, they get to ask questions about. And we just don't want extra questions and sending an extra document that can require additional documents on top of it. We don't want that. We want to send in the minimum amount possible, and this is the best solution here. 

Send the gift directly to the settlement agent

So what happens a lot of times is people make the mistake of they have the donor, sending them a check. They're like, oh yeah, I already sent them a check and I deposited it. Okay, now that has to be documented as one of these options. The easiest solution is to have whoever's giving you money, have them send it directly to the settlement agent. Around here, that's our title agent. So send it directly to the title agency and they can provide a receipt that money was received. And then you don't need anything from your statement side.

They don't need anything from the donor statement. It just makes. Easier than having to use, send in bank statements multiple times to show the money you had and now the new gift and it's, it gets a little complex and people start getting frustrated. And so just have the donor send it directly to the title company. It's going to work out the same way, whether it hit your bank. Or it's just applied as a credit towards your cash to close. So you still get the gift both ways.

Gift of equity is allowed

Gift of equity is allowed and that is where someone would, instead of giving you a check for money or sending that to a title company, they're gifting you a portion of the equity they already have in the home and basically transferring that over to.

Conventional - Freddie Mac

For Freddie Mac same thing, it's a conventional loan. It's just a different brand of a conventional loan. Might be a good way to think about it. You have Fannie Mae, Freddie Mac, talk to your loan officer about which one you're using. It's going to be the same thing as Fannie Mae.

Wedding gifts are allowed

The only really interesting difference here is that it does allow wedding gifts, Fannie Mae, and all the other loans. Don't talk about wedding gifts, except Freddie Mac actually mentions it in their guidelines and they don't limit who the eligible donors are right in the. I talked about who could be an eligible donor, but with Freddie Mac, if it's a wedding gift, it can be anybody.

So what it requires is a copy of a marriage license and verification of the gift fund deposit within 60 days of the date of marriage, if it's beyond 60 days at that point, those funds have seasoned in a much, I've talked about my down payments, video and. You don't, it's not going to be treated as a gift anymore. It's just going to be your own funds. But if it's within that 60 days, it's a gift and you need those two things.

FHA Eligibility

Eligible donors. FHA is a lot more strict on the gift requirement side, so they can say a family member I'll just run through this list really quickly. Child foster child, parent grandparent spouse, or domestic partner, Lilia adopted son or daughter, brother, sister step-brother step-sister uncle, aunt son, daughter, father, mother, brother, or sister-in-law, employer or a labor union, a close friend with a clearly defined interest in the bar where this one is really tricky. I've only heard stories of people being able to make this work. I've never actually seen it in person. Usually, the only time I've seen this work. It tends to be when it's a couple who is engaged and there are close friends and the clearly defined interest is a fact that they got engaged.

No vague proof that someone gave you gift

I've heard stories of people saying, yeah, a friend gave money and they printed out their Facebook newsfeed of how much they poked each other and whatever you do on Facebook. I don't know. Really flies anymore. This is one of those kinds of gray areas for underwriters that they usually aren't okay with just signing off on, because it's so vague. The other one is a charitable organization or government entity. This would be like if you're getting down payment assistance would be through something like that.

FHA primary residence

Only FHA loans are for a primary residence. Residents have only anyway cash on hand is not allowed. A donor cannot take cash and just hand it to you. That's not acceptable source documentation. Okay. So again, we have three different options here.

Cash on hand is not allowed

The first is if it's already in your account if they gave you money and it's in your account already, you need the donor's bank, state. Showing withdrawal and evidence of deposit into your account.

This is the big thing with the FHA, that trips up a lot of people are that if you're getting a gift from somebody. You should expect that the underwriter is going to ask for 30 days worth of bank statements from the donor. It's really frustrating. I'll explain a little bit more of that in detail. The amount of times I've had people yell at me because of this is too many to count, but that's just the rule.

I, unfortunately, can't change it. That's the FHAs rule. They want to see the donor bank statement as well. Okay. So just that's a heads up. If you're using an FHA loan and getting a gift, you need to have that conversation with the person giving you the money. Hey, this is what's required on the loan. These are the guidelines, and then they can make that decision.

If they're comfortable giving you the money after that. But that's a conversation you need to have with your donor. If it's not in your account, they need a certified check money order. Cashier's check or a transfer, showing that with.

Paid directly to settlement agent

Then also we can do the solution that I like the best, which is paid directly to the settlement agent, and then the loan officer can actually reach out to the settlement agent and get a receipt showing that they actually have that. Even if it's paid directly to the settlement agent, you still should expect that the underwriter's role requests the donor's bank statements.

Gift of equity, yes from family members

A gift of equity is allowed, but the only eligible donor is a family member. So FHA does have this small little, blurb in their guidelines that says, regardless of when the gift funds are made available to a borrower, the lender must make a reasonable determination that the gift funds were not provided by an unacceptable source. A real estate agent or someone like that. This usually requires a copy of the donor's bank statement.

So just know that when you go into an FHA loan, looking at a gift, you likely are going to need a bank statement from the donor and keep it in mind. It's not so if you're getting a gift from, let's say a parent, they don't have to, your parent doesn't have to send you their bank statement and then you send it to your loan officer. They can send it directly to the loan officer. Like I've done that plenty of times. So nobody sees each other's bank statements. Nobody sees what's going on, but the underwriter has to verify that it didn't come from the seller or the realtor or whatever.

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USDA loans eligible

This is a little bit different on USDA and VA because they don't have this long list of "has to be a family member". It's really anyone that doesn't have an interest in the sale of the property the seller, the builder real estate agent. So as long as it's not those people, it can be a friend. It can be any random person who decides to give you money.

Don't need to be family

It doesn't require the donor to have familial ties to the borrower.

Gifts cannot be used as reserves and cash on hand is not acceptable

That's just a little side note in there on other loans, you can use a gift as a reserve. Sometimes loans like FHA might say you need three months of reserves. That's the money leftover in your bank account after you pay for your down payment closing costs. But on USDA, it cannot be reserves. Cash on hand is also not acceptable.

VA eligible donors

Same thing as USDA. Anyone that doesn't have an interest in the sale of the property. And then for documentation, it's a lot more lax. It is just evidence of the borrowers. Or a copy of the donor's funds by check alone, electronic transfer to the closing agent, or the CD showing receipt of donor funds.

USDA and VA are the same

So the way that both USDA and VA work is going to be very similar and it's going to be best to just transfer it directly to the title agent. Gift the equity is not in the guidelines, but it's likely similar to USDA. So with USDA, the way that gift of equity works is that since USDA and VA are both 0% down normally you're not really needing a down payment. And so it doesn't really make sense to have a gift of equity. Instead, it's a reduction in the purchase price.

Rate Trick

One rare trick that probably is going to be used is not going to be used by a lot of people. I've only run into this a couple of times, but if you have somebody who is willing to give you a 100% gift, this is a very rare situation. So I call it a rare trick. I've run into a situation where a parent wanted to give a son cash to buy the home, but then the son was going to pay the money back and get a mortgage for it. So the son got the advantage of having a cash offer, but being able to take long-term financing.

Delayed Financing

Now, normally people do this on their own. When people have the cash, they can do this on their own, using a method called delayed financing. But when someone else does it for you, this is the trick to make it work. If you're in this very rare and unique situation the way that this happens is somebody can give you someone who can pay cash for that. It can be in your name, but then what they need to do is actually write a small little note, like a, they can look up notes, template online. They need to give you a loan that has a payback period and interest rate and all that. Then what ends up happening is you can actually do a rate and term refinance to pay them back, and then you'll have a long-term loan, but you able to do a cash offer upfront.

So very rare trick, not a lot of people in that situation, but I don't think a lot of people know that solution does exist if you are in there.

Best Plan

Here's the best plan. All right, boiling all this down, look into the unique loan that you're using and the requirements. The first thing is a gift letter is going to be written. Then don't move money around. Please don't move money around. It just makes it so much more complicated and then you get defined to what you're able to do. So the gift letter is going to be written. You're going to get this from your lender, ask your lender for the gift letter. You're going to fill that out, fill it out with your donor. And then have the donor directly transfer the money to the settlement agent. Talk to your lender about who exactly do I need to send that money or who do they, who does the donor need to send that money to. If you're using an FHA loan, expect that they will request the donor's bank statements. Even if you do that, this is the easiest solution here.

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