Saving up for a down payment can be a daunting task for home buyers. Down payment requirements vary depending on the type of mortgage loan the homebuyer is considering. FHA loans require down payments as low as 3% while conventional loans can be as high as 20%.
For this reason, it is not uncommon for family and friends to offer help to first-time homebuyers in securing a home loan by putting forward part of the down payment. There are a large number of loans that allow the borrower to receive a certain amount of the down payment as a gift. The reason that there is so much regulation and rules around down payment gifts is that lenders and regulators both want to ensure that the home buyer is accepting a loan that they can afford.
To ensure that the down payment gift can be used in the mortgage, it must be received properly. If it is not given in a certain way, then lenders may not be able to allow the borrower to use it. Here are five tips on how borrowers can manage down payment gifts.
- Gift Letter
When giving a down payment gift, authoring the ‘gift letter’ is very important for the underwriting documentation. A common mistake is to simply transfer the money over to the borrower’s account. This often results in a declined application.
Instead, the gifting party must write a gift letter stating the following:
- The amount of the down payment gift ($)
- The property address
- The relationship of the gifter to the borrower
- The gift is a gift and not a loan
The author of the gift letter should avoid any extra details and keep the letter short and simple.
- Genuine Gift & Not a Loan
It is important in the gift letter to document that the down payment funds provided by the gifter are indeed a gift and not a loan. The lender must understand the borrower’s capacity to repay the mortgage and adding another personal loan to the mix just complicates the application.
Most lenders will require the giver to show bank statements of the gift amount leaving their bank account. Make sure that the amount transferred matches the amount state in the gift letter. This paper trail is very important for the lender’s documentation.
- Limitation (6%)
In general, homebuyers are permitted to accept a down payment gift up to six percent of the home’s purchase price. For example, the borrower is going to purchase a $200,000 home. That borrower could accept a down payment gift of up to $12,000, provided that it is properly documented.
Setting a maximum on the gift amount ensures that the borrower contributes to the down payment as well which helps demonstrate the ability to save money. Remember, lenders always evaluate the borrower’s ability to save money and this is one way to show that the borrower does have that ability. This also indicates to the lender that the borrower has extra money each month and that the borrower manages that money well.
- Tax Implications
One thing that both the borrower and the gifter of a down payment gift should keep in mind is that there might be tax implications. Any discussion about the impact of a down payment should include the family accountant before the gift is transferred.
When a down payment gift is transferred, it is up to the individual parties to report the gift to the IRS if necessary. This is not the lender’s responsibility.
Pacific Union Financial
Pacific Union Financial, LLC is a full-service mortgage lender providing mortgages, refinancing, and loan servicing across the country and around the corner. With expertise in home loans for credit levels from best to bruised, we’d love to help you enjoy all the benefits of homeownership. Get in touch today and let us show you how we work hard to make mortgage easy.