Given home-affordability challenges facing first-time buyers today, we at the Mortgage Blog want to cover a couple of creative ways homebuyers can finance a purchase in this market. In a future post, we will cover non-occupant co-borrowers. Now we will focus on “gifts.”
In the mortgage world, a gift is when someone gives the homebuyer cash to help cover the down payment and closing costs. The key is that the funds given must truly be a gift – there can be no expectation of repayment. To that end, both the giver and the recipient must sign a letter clearly stating that the funds are a gift and no repayment is expected. The executed letter is reviewed by underwriting and stored with the loan file. Note that gift rules are different for 2nd home and investment home purchases, as compared to a primary residence purchase. This post will focus on primary residence purchases only.
Let’s now focus on three details: (1) WHO can give funds for closing, (2) HOW MUCH can be given, and (3) what DOCUMENTATION is required for a gift.
Givers typically are relatives of the homebuyer, including spouses, parents, grandparents, siblings, and adult children. The relationship can be established by blood, marriage, adoption, or legal guardianship. Grants to help fund home purchases can be provided by government agencies, non-profit organizations, and the homebuyer’s employer. FHA loan guidelines even state, “a close friend with a clearly defined and documented interest in the borrower” is an acceptable giver. The donor may not be, or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction. I have a loan now where the giver is the buyer’s stepfather.
Acceptable donors can give any amount they choose to help the homebuyer close the loan. There is no limit on the gift amount. And homebuyers can receive gifts from multiple givers. Some of my clients have received relative-given amounts over $100,000.
To approve a gift, underwriting requires specific documents. In all cases, the executed gift letter, described above, is required. For a conventional loan, if the giver elects to wire the proceeds directly to the closing attorney, the letter is the only document required. This is the easiest approach and typically preferred by the giver. When the giver gives the funds directly to the homebuyer or when obtaining an FHA loan, more documents are required. Firstly, a copy of the gift check or wire transfer receipt is required. Secondly, the giver must provide a bank or investment account statement showing an account balance prior to the gift and showing the gift funds withdrawn from the account. Thirdly, the homebuyer must provide an account statement showing the gift funds deposited to their account. In most cases, generous givers would rather not provide their own bank statements for review, so the option of wiring funds to the closing attorney is typically preferred.
Want to buy a home in Georgia but don’t see a way to make it work financially? Give me a call and let’s talk about your options. I’ll give you some creative solutions including gifts and co-borrowers that could make homeownership a reality for you.
