The requirement for down payment when first time home buyers enter the market has seemed to present an obstacle after years of 100% financing options and down payment assistance programs. Another challenging area is when children want to assist their aging parents purchase a home. The rules for down payment and gift funds are not 100% clear and they do vary based upon the loan type FHA, VA, USDA (Government loans) all have different rules. Conventional financing has its own set of requirements for down payment and gifts.
For Fannie Mae and Freddie Mac a buyer must have 5% of their own seasoned funds into the transaction. By "seasoned funds" we mean funds in an account that do not show up as a large deposit within the most recent 60 days of bank statements. For example a couple is buying a $200,000 home and the parents are willing to give $20,000 towards the purchase of their home. The couple will still need to have $10,000 of their own funds to get loan approval. The only exception to this rule is if 20% or more of the purchase price is gifted in which case the buyer does not need any funds of their own. In our above example of the parents and grandparents donated $40,000 then the couple would need $0 of their own to close.
Government loans have different rules: 100% of the down payment and closing costs may be gift funds and the borrower is not required to have any of their own funds into the transaction. These loans often have higher closing fees that will need to be covered. In most cases these will have monthly mortgage insurance premiums as well (resulting in higher monthly cash flow requirements). The good news is this type of loan does provide an opportunity for first time buyers and retired borrowers to get into a home without the large upfront cash outlay.
In general gift funds must come from a direct relative. There are exceptions on a case by case basis when the gift can come from a individual that is very close to the borrower such as a foster parent or fiancÃ©. Funds can come from churches and other non-profit groups.
Gift funds may be the perfect way for someone to take advantage of the record low interest rates and begin home ownership now.
As always Deanna and I are here to answer any gift fund questions you may have. All our best to you for a great week!
@ The Valeo-Croy Team, we are here for you.
The Valeo-Croy Team -Â (704) 366-7711
Todd Croy - NMLO license #91428
Deanna Valeo - NMLO license #91421
Accessible | Program Expertise | On-Time Closings