E Mortgage Blog

How much gift money can I use?

 Gift money is a great way to assist you in getting into a home when you have little funds to purchase. Some buyers and their real estate agents have a hard time structuring these type of transactions, it is relatively wimple and painless if you follow the correct guidelines. A Gift for the down payment and closing cost may come from sources such as: family member, close friend, borrower’s employer or labor union. However, a charitable institution, or a governmental agency or public entity that has a FHA accepted down payment assistance program will not be allowed after October 1st, 2008. 

Latest news says our politicians are trying to pass HR 6694 that will re-establish the down payment assistance program.  Go Figure!  Actually, they have inserted some control factors.  check it out at: HR6694

All funds for down payment and closing expenses may come from an acceptable gift or grant program. These funds must be completely documented to show that no repayment is expected and the donor will not place a lien on the subject property.  Gifts may not be used to meet the borrower’s  3 months PITI reserves requirement for 3 and 4 unit purchases.

Gifts must not be used to increase a borrower’s assets to show reserves after closing that would alter the DU or LP findings from a  Refer or Ineligible status to an  Approve Eligible or Accept status. The underwriter must review the  findings to determine whether or not any gift amount is considered in the reserves reviewed by the system. The gift amount must be deducted from the reserves and the loan must be run through the system again to provide the real picture of the borrower’s assets and obtain a clear for close approval.

An original gift letter is required. The letter must state there is no repayment required and state the donor is not tied to the loan transaction.

The lender must completely document the transfer of gift funds from the donor’s account to the borrower’s account by obtaining a copy of the canceled check or other satisfactory withdrawal document that shows the gift leaving the donor’s account and then being deposited into the borrower’s account.  If the gift  is being received at the closing, a certified check from the donor and a copy of the withdrawal receipt from the donor’s bank account is required. The closing agent must make copies of these documents and forward to the lender with the closing package.

If the donor borrowed funds for the gift, the donor must provide acceptable documentation that the funds were not borrowed from a party in the transaction or the mortgage lender. Cash on hand from the donor is not acceptable.

On FHA loans, you can receive up to 6% in concessions. (On $100,000 purchase price, $6,000) Typically the lower the purchase prices the higher percentage of seller concessions you will need. It is not typical to have a $300,000 purchase price and need $18,000 in seller concessions. It is much more typical to see, for instance, a $60,000 purchase price and have $3,000 in concessions.

On USDA loans, there is no limit to the allowable seller concessions, other then it has to make sense, it is best to use FHA guidelines here but more sometimes can get thru. A buyer would not typically need a percentage of seller contributions over about 4-5%. There are some examples below of reasons why a high percentage of concessions would be needed.

Having the seller pay some or all of your closing costs is common. Some buyers and their real estate agents have a hard time structuring these types of transactions. Below are FAQ's to help you understand the structuring needed for a purchase with seller concessions.

How much can I ask for in seller concessions?

Typically on conventional loans the most a buyer receives in seller concessions is 3% (On a $100,000 purchase, $3,000). Making a larger down payment can raise the amount of concessions allowed from 3% to 6% or even 9%. However you rarely see these high concession amounts because if a buyer is putting, for instance, 25% down on a home, they don't have the seller pay concessions for them. Not only that, but if you need 9% in concessions, something is usually wrong with your financing.

On FHA loans, you can receive up to 6% in concessions. (On $100,000 purchase price, $6,000) Typically the lower the purchase prices the higher percentage of seller concessions you will need. It is not typical to have a $300,000 purchase price and need $18,000 in seller concessions. It is much more typical to see, for instance, a $60,000 purchase price and have $3,000 in concessions.

On USDA loans, there is no limit to the allowable seller concessions, other then it has to make sense, it is best to use FHA guidelines here but more sometimes can get thru. A buyer would not typically need a percentage of seller contributions over about 4-5%. There are some examples below of reasons why a high percentage of concessions would be needed.

How do I calculate the seller concessions?

Simply take the purchase price, and multiply it by the percent allowed for the type of loan. For example, a $100,000 purchase price with 3% concessions is $3,000, and 6% concessions is $6,000, etc. On a calculator, you would multiply 100,000 x .03 or .06 respectively.

What can seller concessions cover?

Seller concessions can cover your closing costs which may include mortgage related fees, title company fees, the set-up of an escrow account, your home owner's insurance costs, state taxes or stamps, and more. Many, but not all, home owner's insurance companies will allow you to pay the policy premium at settlement. If that is important to you find out upfront. Seller concessions CAN NOT be used for a down payment.

What is NOT Seller Concessions?

For first time home buyers, a lender and real estate agent that work together closely can structure an offer to purchase a home where you can utilize both a grant to pay for all of your required down payment, and seller concessions to cover all of your closing costs. It is not rocket science. You simply have to work with people that know what they are doing.

It is important for your lender and your real estate agent to convey approval terms BEFORE making an offer on a home. Any real estate agent worth your time would have a buyer pre-approved before submitting offers on a home. This being said, it is important that your real estate agent not only know-how much you can afford, but also the terms and conditions of your approval. Some pre-approvals are contingent on seller concessions and/or grants. This needs to be communicated to all parties up-front.

Am I paying more for a home if I use seller concessions?

Some people may look at their purchase of a home in this way; I can pay $190,000 for a home and pay my own settlement costs of $10,000 I can pay $200,000 for a home and have the seller pay $10,000 of my settlement costs. Viewed this way you are actually financing the costs. You pay interest on $10,000 more, BUT you get to keep $10,000 in your pocket, which more importantly you can keep for a safety net (and earn interest from yourself).

SIDE NOTE: This aspect can not be over-emphasized. If your lender thinks it is "OK" to put you in a home where you have literally a few hundreds dollars in the bank after settlement, you both are setting up for a VERY RISKY situation and one which could go into default very quickly. It is unwise to purchase a home and immediately be poor. It would do all home buyers well to consider this before purchasing a home. Hopefully you will have a lender or real estate agent who would care more about you in this sense then than just getting another paycheck, but don't assume that.

I would like to see you put your 6500-8000 refund check into a CD or invested in the, market to allow you to gain from the free gift the government gives you.

Ways to utilize seller concessions for your benefit

·    Have some or all of your closing costs paid by the seller.

·    As a first time home buyer utilize both the tax credit and seller concessions to cover your closing costs and down payment requirements.

·    Create a financially safe environment by keeping more money in your pocket after settlement. This aspect is overlooked too often yet is very important to you as a home owner.

·    Have the seller pay points for you. This will make your monthly mortgage payment lower by giving you a lower interest rate.  In some cases this can be the deciding factor on if you qualify to buy a home. This will also lower your debt-to-income ratio, which is one of the major factors a lender looks at when approving a loan.

·    Avoid private mortgage insurance (PMI). If you are a buyer that has the assets available to make a 20% down payment, but not enough assets to pay closing costs, then have the seller pay your closing costs. This will bring you to the 80% loan-to-value level and allow you to eliminate PMI. (NOTE: This is all negotiated when you make your offer on a home and agree to terms). The best way to avoid this is a USDA Rural loan.

Conclusion

Seller concessions are an important part of home financing. Used correctly, seller concessions can save a buyer money, allow more financing options, and create a financially safe environment. Consider these important aspects prior to making an offer on a home and you will be much better off, both at settlement and in the long term.

If you are looking for an experienced and knowledgeable Mortgage Banker to assist you in maximizing your options as a buyer in today's market, please call :

America Home Key Inc

Carl M Ashton CMA MBA

Mortgage Banker

2059 Trade Center Way

Naples, Fl 34109

Main Phone (239) 580-9977 and Office/Processing (239) 596-0500

Fax (239) 434-1831 and Office/Processing Fax (239)596-0507

www.americahomekeyfl.com

cashton@americahomekey.com

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