Recently, I have dealt with a number of challenges involving borrowers who are receiving family help with their down payment.
You need to understand the guidelines, and adhere to them if you want to avoid headaches. Here are the rules of the road.
If you intend to use conventional financing for a home purchase, gift funds are allowed with limitations.
The entire down payment may be a gift if putting down 20 percent of the sales price (or more). If the down payment is less than 20 percent, the buyer must contribute 5 percent of the sales price from their own funds.
For example, if you were buying a $200,000 home and making a 10 percent down payment ($20,000), you would have to put in 5 percent of the sales price ($10,000) from your assets. The balance of the down payment, and the money needed for closing costs, may all be gifted to you. There are some exceptions to this rule, involving specialized programs for first-time buyers.
If you are purchasing a home with Federal Housing Administration (FHA) financing, the down payment requirement is only 3.5 percent of the sales price and all of it can be a gift.
Because of this flexibility, the vast majority of loans with gift funds turn out to be FHA financing.
The requirements for documenting a gift are very specific, and they require an orderly plan. There are two issues of paramount importance.
The first is that cash gifts are not allowed — period. The second issue, and the one that creates the most headaches, is the requirement to create a paper trail of the money from the donor to the recipient.
Both FHA and conventional financing require proof that the donor has the ability to make the gift.
This is typically done with a bank statement from the donor. This statement can be sent directly to the loan officer if privacy is desired.
The information is confidential and not to be disclosed to the recipient of the gift. Alternately, the donor may request a letter from their bank.
This letter must be on the bank letterhead, signed by an officer of the bank (preferably with their direct telephone number), disclosing the specific account number that will provide the gift and a balance that is large enough to cover the gift.
Once the gift has been satisfactorily documented in the donor’s account, it can be transferred to the account of the recipient.
The transfer must be fully documented, but this can create headaches and delay.
Instead, I recommend gift funds transfer by Federal Reserve wire to the bank account of the title/escrow company handling the transaction.
The escrow is a neutral third party who holds funds until all conditions of the transaction have been met. When they receive a wire of the gift funds, they are able to show that it came from the donor’s bank account and that is satisfactory proof for the underwriter.
Wiring the money from some other account, or some other institution, is a deal killer.
In summary, remember the classic line from the movie “Jerry MaGuire”, ‘Show me the money!’
Keep that phrase in mind, and it will go a long way in guiding you through the steps needed to get your loan approved.
Last of all, always, always follow the advice and instruction of a reputable loan officer who has been recommended to you by someone you trust.
David Ryland is the acknowledged dean of loan originators at Big Valley Mortgage in Roseville. He has 30 years of experience as a loan officer, manager, trainer and mentor. He can be reached at dryland@apmortgage.com.
