When saving for a down payment, you might assume that you can simply use any money in your account. From life savings to inherited money to personal gifts, it’s all available for use…right?
Not exactly.
Using gift funds as a down payment can actually create a few extra steps that will need to be completed during the application process. While these steps are generally simple and easy, you will need to understand how they affect your application and how they can impact approval.
From the lender’s perspective, not all down payments are the same. If someone has scrimped and saved to generate their down payment, it shows lenders that they are responsible and have a firm grasp on how to handle money. If someone’s down payment comes from a gift, however, it doesn’t show the same level of responsibility. This doesn’t mean they are irresponsible; gift funds simply don’t give the same benefit that you’d get from saving for a down payment.
For this reason, gift funds require special scrutiny, but if you have the right information, you can use your gift funds to increase your chances of mortgage approval.
What You Need to Know About Gift Funds
The Type of Loan Will Impact the Rules for Gift Funds
Different types of loans will have different rules and approval processes. For example, with a conventional loan the entire down payment can come from gift funds if the down payment is 20% or more of the home value; if the down payment is less than 20%, part of it will need to come from personal funds. With a VA loan, on the other hand, if you meet credit requirements all of the down payment can be gift money, regardless of the percentages.
Almost Any Family Member Can Give a Gift
With conventional loans supported by Fannie Mae and Freddie Mac, virtually any family member can give you a gift to use as a down payment. This includes gifts from a spouse, child, or parent, but can also include anyone whom you are related to though blood, marriage, legal guardianship, or adoption. Even fiancés and domestic partners can give you a gift that you can use as a down payment.
However, the gift-giver (called a “donor” in the lending industry) will not be allowed to have a financial interest in the property you are purchasing. So, for example, if your fiancé is also the selling real estate agent, they can’t give a gift.
You Will Likely Need a Gift Letter
When you use a gift as all or part of your down payment, the lender will likely need a document called a “gift letter.” The document will provide a wide range of information, but most importantly it should describe the amount being given and clarify, in perfectly straight-forward language, that the money is a gift and not a loan. You’ll want to talk with the lending agent about other content included in the letter, but other information will include the name of the donor and gift receiver, the relationship (father, grandmother, or son, for example) and the date that the funds were transferred.
The Funds Do Not Alway Need to Be “Sourced”
Generally if you are using a conforming Fannie Mae or Freddie Mac loan, the funding you use for your down payment will not necessarily need to be sourced. For these agencies, the requirements state that the lender will need to confirm the gift money from your account, but providing information on the specific source may not actually be required.
With loans that are supported by the government through organizations like the FHA, VA, and USDA, however, detailed sourcing of the funds may be required.
Gift Funds Can Be Used as Cash Reserves
One of the biggest challenges to securing some types of loans is not just the down payment, but also the cash reserves. This can be true if you are using the loan to purchase an investment property, for example. The cash reserves are required so the lender knows you can pay the mortgage even if your financial situation changes.
Gift funds, fortunately, can be used to improve your cash reserves, which could open many lending options for primary residences, secondary homes, and investment properties. It could even help you secure a loan for a commercial space, depending on the situation.
Gifts, In Most Cases, Can be 100% of the Down Payment
As we discussed earlier, certain loan situations will require that you bring some of the down payment from personal savings. However, if the gift fund is all you have for a down payment, you still have options for your purchase, as some loans allow down payments to be 100% from gift funds. For primary residences that are single-family homes (no duplexes), you should be able to use gift funds for the entire down payment.
Restrictions will occur, especially if other units are included in the home. Purchasing duplexes and multi-unit properties will often need a down payment that has a portion of your own funds, and if the property is entirely an investment property, then you likely won’t be able to use any gifts as your down payment.
You Can Also Use Gifts to Pay Off Debts Before Applying for a Mortgage Loan
Another option that may help you purchase a property is to use the gift funds as a way to pay off loans. This could allow you to eliminate other debts that may be holding up a loan, and could be the best option if you receive a gift but can’t use it as a down payment. Paying off debts will lower your debt-to-income ratio, which is an important factor for many lenders.
Providing Reliable Support for Your Mortgage Issues
If you have questions about using gift funds for a down payment, let the knowledgeable team at San Diego Purchase Loans answer all of your questions. We’ll take a personalized approach to your borrowing situation so you can get the best possible terms to fit your specific needs.
With a common-sense approach to lending, we can increase your chances of approval on an affordable mortgage loan, no matter how large your down payment!
