As the American economy continues to improve, we are also seeing a spike in charitable giving across the country. Americans gave more than $358 billion to charity last year, which may be the highest amount in history. But in addition to giving to favorite charities, Americans are also starting to offer gifts of down payment funds to relatives and friends.
Mortgage gift funds, or down payment gifts, are on the rise as more and more first-time homebuyers enter the market. But what are mortgage gift funds, and how can you make sure they are used properly? Below, we offer insights you can use as you navigate the world of down payment and mortgage gift funds.
What are mortgage gift funds?
Even as lenders lower the amount required for a down payment, first-time homebuyers know that it’s advantageous to put down as much at closing as possible. In some cases, their parents, grandparents or other close family and friends offer to give them the funds needed for the down payment.
These gifts are more serious than Grandma’s annual birthday check, though, so if they are above a certain amount, they must be closely recorded and tracked throughout the home loan process.
What amount qualifies as a mortgage gift fund?
The answer to this question depends on the borrower’s finances, so let’s consider a hypothetical bank account for a homebuyer named Jody. Typically, any amount more than 50 percent of the borrower’s monthly income must be tracked by a lender when the loan is being approved and processed. If Jody’s monthly income is $5,000, then a gift of more than $2,500 should be recorded and tracked.
But lenders don’t only look at the amount of the gift, they also look at the history of the bank account. If Jody usually keeps only a few hundred dollars in her account, and suddenly deposits $2,480 into the account, the lender may ask for an explanation of that deposit even though it’s less than 50 percent of her monthly income.
How do I record and track the gift funds?
Prior to applying for a loan, the homebuyer should request a form letter from each donor that clearly states:
- The amount of the down payment gift
- The donor’s name and contact information, including their address
- The donor’s relationship to the homebuyer
- The date the funds were transferred
- The address of the property being purchased
- The donor’s signature
- A confirmation that the funds are a gift, and are not expected to be paid back by the homebuyer
It’s important that the gift fund be just that—a gift—because loan eligibility is based partially on the borrower’s debt. A personal loan counts as debt even if there are no interest terms set, and even if Grandma Ruth has promised that Jody can pay it back at her leisure.
What account should I deposit my gift funds into?
The easiest way to deposit your gift funds is to put them into the account that you will use to pay your closing costs and the rest of your down payment.
How do I record my gift funds?
When depositing your gift funds, be sure to deposit them in person at a bank branch (not via an ATM or phone app), and to deposit each gift separately. Be sure to double-check that the amount on the bank deposit slip matches exactly what is on your down payment gift letter, as any inconsistencies could lead to the lender rejecting the gift. Collect and keep a deposit slip for each separate transaction.
Can I use only gift funds to pay for my down payment?
Typically, if you are applying for a conventional loan and have more than 20 percent down, all of the money can come from gift funds. If you have less than 20 percent down, your mortgage loan officer will tell you how much must come from your personal funds. Gift funds for conventional loans can only be used on primary and secondary home purchases.
If you are applying for an FHA or VA loan, all of the down payment can usually come from gift funds if your credit score is higher than 619. If your credit score is between 580-619, 3.5 percent of the down payment must come from your personal accounts. Gift funds for VA and FHA loans can only be used for primary residences.
The above guidelines may vary by lender, so it’s important to verify with your mortgage loan officer in advance if these guidelines are true in your case.
Ready to begin the home buying process?
Whether you have Grandma Ruth’s lottery winnings promised to you or will secure a loan on your own, it’s a great time to be a first-time homebuyer. Call, email or chat to get pre-approved on a loan, or to find a local real estate specialist in your area.