Saving up for a down payment can be tough for first-time homebuyers in Orange County, especially if you would like to put down 20% of the purchase price. It’s common for buyers to get a little help from family for their first big purchase. However, there are a few rules and requirements on using gift money for your down payment.
Who Can Give the Gift?
For a conventional loan, only close family members can be the gift givers. This means parents, grandparents, brothers or sisters, spouses, domestic partners, fiancés, or other individuals that need to be related by blood, marriage, adoption or legal guardianship.
Conversely, FHA loans allow for more parties to be gift givers in addition to the above list. An FHA loan permits gifts from close friends with a clearly defined and documented interest in the borrower, borrower’s employers and labor unions, and charitable organizations. However, you are not allowed to receive a gift from anyone with an interest in the sale of the home such as the buyer or seller’s real estate agent, the home builder, or the seller.
How Much Needs to Be Given?
If you intend to put 20 percent down on a conventional loan, all of the funds needed can come from a gift. However, if you plan to put down less than 20 percent on a conventional loan, you’ll have to invest some of your own money. The company that you’re buying PMI (private mortgage insurance) from will determine how much of the down payment will need to be your money in addition to the gift. With an FHA loan, all of the down payment can be a gift.
How to Properly Document the Gift
No matter who is giving the gift or what the amount is, you will be required to provide documentation of the gift. This is partly to ensure that the money really is a gift and not a loan with strings attached. If the money is a loan, even from a family member, it will affect your debt-to-income ratio and how much you can borrow.
The first thing you’ll need to document is a gift letter. Here is a free template of a gift letter.
The gift letter should contain:
- The borrower’s name
- The donor’s name, address and phone number
- The donor’s relationship to the borrower
- The property address
- The gift amount
- A statement that the borrower isn’t expected to pay back the gift
- A statement that the donor has no interest in the sale of the property
- The borrower’s signature
- The donor’s signatures
In addition to a gift letter, you’ll also need a paper trail showing the movement of the gift money from their bank account to yours. This can be shown in bank statements, a cashier’s check, or wiring information.
If the gift money has been seasoned in your account, banks and lenders likely won’t ask about it. This means the money has already been in your account for over 2 months before you begin the buying process. If you do this, you can also avoid the need for documentation.
If you are looking to buy a home, we would love to help you with any questions about down payments or the entire process. Contact us at 949-392-6400 to get started on your home buying journey.