Many people find it difficult to save for a down payment to buy their first home. That’s why it’s a big help when they receive a lump sum amount of money from a loved one that they can use to fund a down payment. It’s called a gift fund. Homebuyers taking out a conventional loan are required to follow guidelines if they will use a gift fund for their down payment. Lenders may not approve the mortgage if you could not prove the source of the gift fund.
As a first-time homebuyer using a gift fund, you must meet your lender’s strict underwriting requirements to prove that the fund you’re going to use is a legitimate gift and not another loan from a relative or someone else. A lender could suspect you of mortgage fraud and deny your loan if you fail to follow the guidelines for a gift fund.
Acceptable gift fund sources
Fannie Mae, one of the two government-sponsored enterprises that buy lenders’ mortgages, allows you to use a gift fund if it came from either a relative, defined as your spouse, child, or other dependents, or by any other individual who is related to you by blood, marriage, adoption, or legal guardianship or, your domestic partner or someone you’re engaged to marry soon.
Contribution requirements from the borrower
A gift fund is a big financial help to fulfill your homeownership dreams as you can use it without taking a penny out of your pocket. However, there are situations when the lender will still require you, as the borrower using a gift fund, to use your own finances first for the down payment to a conventional mortgage you may want to take.
Minimum contribution requirements will start to kick in once the percentage of the money you plan to borrow referred to as loan-to-value ratio is more than 80 percent and you’re buying a 2- to 4-unit principal residence home or second home. A lender typically requires a 5 percent minimum contribution before you can use a gift fund to supplement the down payment, closing costs, and reserves.
If you’re just buying a 1-unit principal residence home, your lender may not require you to contribute your own finances even if you’re borrowing more than 80 percent of the value of the property. Simply put, you can use a gift fund to put a very low down payment of 3 percent and to finance closing costs and reserves.
Lenders require a verified, detailed gift letter
Lenders will require you to write a gift letter to prove that the gift you’ll use to take out a mortgage is indeed a gift from an acceptable donor that you don’t have to repay. When writing a gift letter, you need to put specific details including dollar amount, the date when the funds were deposited to your account, and a statement from the donor that you will not repay the funds. The letter should also have the donor’s complete name and contact details and how he or she is related to you.
A gift letter is no longer a requirement if you can prove that you’re living together with the donor for the past 12 months and you expect to live with him or her in the home you’re going to buy. A good example of this is when you receive a gift fund from a spouse, it’s no longer considered as a gift fund. Instead, the lender will consider it as your own funds that you can readily use to complete a mortgage transaction.
You also need to provide supporting documents for the lender to verify the authenticity of your gift letter. Basically, your lender would want to verify if the amount of gift fund is in your account, when and how the deposit was made. Acceptable supporting documents include copies of the donor’s check, deposit and withdrawal slips on how the fund transfer was done.
If you’ve been living together with the person who gave you the gift fund and expects to live together again on the home you’re going to buy, the donor must issue a certification that he or she has been living with you for the last 12 months and will continue to live together with you in the new home. To prove a history of shared residency, your address must be the same as the donor. You might need to provide copies of driver’s licenses, bank statements, or utility bills.
Because lenders could have varying requirements, it’s ideal to ask your loan advisor for advice.
An RPM loan advisor can help you fulfill your homeownership dreams
Receiving a gift fund from a loved one is indeed a great help in helping you fulfill your homeownership dreams. However, you need to know that aside from following the gift fund guidelines, the homebuying process could be stressful for first-time buyers. Get in touch with one of the professional RPM loan advisors today for more information on how you can use a gift fund to buy your dream home.