The holidays are quickly approaching. ‘Tis the season for giving!
If you or someone you know is looking to purchase a home this holiday season, what better gift to give than a gift to last a lifetime in the form of a down payment for a close family member?
If you’re considering giving the gift of homeownership to someone this year, there are some things you need to know as gift funds must meet certain requirements. We’ll cover the different loan programs that allow borrowers to use gift funds towards their down payment.
FHA Loan Gift Fund Guidelines
Who Can & Can’t Give FHA Gift Funds:
- If you apply for an FHA loan, your gift funds must be from family or another eligible donor.
- A close friend with a clearly defined and documented interest in the borrower.
- The FHA allows gifts from your employer, a labor union or from charitable organizations.
- You can use funds from government agencies or public entities that help low-to-moderate income or first-time home buyers.
- Cousins, nieces, and nephews are not able to offer gift mon
ey under standard family guidelines.
What Can FHA Gift Funds Be Used For?
- Gift funds can be used to cover things such as the down payment, FHA closing costs, or even the reserves needed for approval. In addition, if the gift is large enough, it could cover everything mentioned above.
- Your down payment can come from gift funds if your credit score is above a certain amount. However, the down payment used for an FHA loan cannot come from another loan or source where the down payment needs to be repaid (i.e., another loan or credit card advance)
- Finally, FHA Gift Funds can be used on primary residences only.
Conventional Loan Gift Fund Guidelines
Most conventional mortgage loans allow homebuyers to use gift money for their down payment and closing costs if it's a gift from an acceptable source, such as from family members.
Approved Sources of Conventional Loan Gift Funds:
- Fannie Mae & Freddie Mac define family as:
- Children (including adopted, step and foster children)
- Sibling (including step-sibling, foster and adopted siblings)
- Grandparent (including great-grandparents, step and foster grandparents)
- Aunt and uncle (including great, step and foster aunt or uncle)
- Niece or nephew (including step-niece or nephew)
- Cousins (including adopted and step-cousins)
- In-laws (including parents and grandparents, aunt, uncle brother- and sister-in-law)
- Domestic partner
What Can Conventional Loan Gift Funds Be Used For?
- Gift money can only be used on primary residence and second homes.
VA / USDA Loan Gift Fund Guidelines
Who Can & Can’t Give VA/USDA Loan Gift Funds:
- Must come from a family member.
- The gift cannot be from someone who is an interested party. An interested party would be someone who has a role in your transaction, such as a builder or developer, another broker, a real estate agent or the seller.
What Can VA/USDA Loan Gift Funds Be Used For?
- You can use gift money for your down payment with a VA/USDA Loan.
- Because they are 100% financing, there is no limit on the amount of the gift.
Can a Mortgage Gift be Repaid?
It’s called a gift for a reason, right? The answer is no. Therefore, the gift giver provides
funds to a home buyer with no expectation of being repaid.
Will I Need to Provide a Gift Letter?
Yes, before you use the gift funds, you will need to submit a gift letter to your lender. This proves your relationship with the gift giver and that the funds are a gift and
repayment is not expected. Some things to include inside your letter are:
- Dollar amount of gift
- Date funds were transferred
- Gift Giver’s signed statement that no repayment is expected
- Gift Giver’s name, address, and phone number along with the relationship to the borrower & buyer
- The address of the property being purchased
Check with your loan officer to see what information is required in your gift letter.
Keep in mind, gift funds in all cases will need to be documented. If you know you are about to receive a holiday infusion of cash, doing so by check is the easiest and often most convenient way to satisfy the lender.
Happy Holidays from Emerald Home Loans!