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Giving the Gift of a Mortgage this Holiday Season

 

Mortgage Gfits

With the holiday season upon us, it’s important to know that gifts aren’t just something you will find wrapped in fancy paper and big bows. Believe it or not, a gift between family members is perfectly acceptable when purchasing your primary or secondary home.

During this holiday season Guaranteed Rate wants you to know gifts aren’t limited to store bought trinkets – now you can add a mortgage to your list.

Types of Mortgage Gifts and Gift Rules

There are two types of gifts you can receive or give when you or your loved one wishes to purchase a new primary home or a new second home: a cash gift or an equity gift.

Let’s briefly define these types of gifts:

Cash Gift

This is a dollar amount being given or received for earnest money, down payment or closing costs.

Equity Gift

Equity is the difference between what is owed on a home versus what the home is worth. When buying a home, the seller (your family member) can offer equity as all or a portion of your down payment.

Being familiar with the kinds of available gifts when applying for a mortgage is merely the first step. Next, let’s better understand how specific lenders will manage these types of gifts.

The truth is most lenders’ mortgage gift rules are similar—with some subtle differences—so when you know you will be giving or receiving any type of financial or equity gift, discuss it with your mortgage professional so he or she can properly guide you through the process and help you avoid any pitfalls.

Here are the general mortgage gift giving guidelines for each type of loan:

Conventional (Fannie Mae/ Freddie Mac)

Typically conventional loans are those under $417,000; however, this is not the case in every area of the country. If you reside in a high-cost area the loan limit will be higher – which means loans as large as $625,000 could still be considered conventional.

Basic gift rules for conventional loans:

  • The gift must be given or received by a relative. A relative is defined as: a spouse, child or dependent related by blood, marriage, adoption or legal guardianship. Also, your fiancée or domestic partner counts too.
  • Gifts may not be given or received by any one person involved in the purchase or sale of the home. This relates to real estate agents, builders and mortgage professionals.
  • If you are putting down 20 percent or more, the entire amount can come from a gift and you will not need to contribute your own funds. This applies to any property up to a four unit multi-family.
  • If you are putting down less than 20 percent, the rules become a bit tricky. Simply put, to receive a gift for anything other than a single family home requires a 5 percent contribution from your own savings.
  • No repayment of the gift may be expected or implied.

Jumbo Loans

Jumbo loans exceed the local loan limit restriction, and again, they will be larger in the high-cost areas.  Gift requirements for jumbo loans vary from lender to lender and typically are not as lenient as Fannie Mae and Freddie Mac gift guidelines.

Basic gift rules for jumbo loans include:

  • If you are putting more than twenty percent down, then entire amount can come from a gift and you will not need to contribute your own funds.
  • If you are putting less than twenty percent down, you will be required to contribute at least ten percent of your savings.
  • Some jumbo lenders will not allow for a gift of equity.
  • No repayment of the gift may be expected or implied.

FHA

The Federal Housing Authority (FHA) offers homeowners an opportunity to purchase a new home with as little as 3.5 percent down. FHA gift giving guidelines are relatively flexible. If you are applying for an FHA loan, the minimum required down payment is 3.5 percent and both the entire down payment plus closing costs can be gifted.

Basic gift rules for FHA loans:

  • Your entire down payment can be gifted.
  • There is no requirement regarding how much you must contribute from personal savings.
  • FHA will allow gifts from relatives and close friends.
  • Gifts may not be received or given by anyone involved in the sale or purchase of the home.
  • No repayment of the gift may be expected or implied.

VA

Mortgages offered to veterans insured by Veterans Affairs (VA) require no down payment, so they are a bit different than the other loans when it comes to gifts. There are, however, costs associated with attaining a VA loan and a gift from a loved one can help. While the VA has no formal lending rules regarding gifts, there are some expectations to keep in mind.

Basic gift guidelines for VA loans:

  • Your entire down payment can be gifted, if you choose to have one.
  • Gifts from relatives and close friends are acceptable.
  • A gift of an outright cash investment is acceptable if gifted from a relative.
  • Equity gifts are acceptable between family members.
  • No repayment of the gift may be expected or implied.

USDA

The Department of Agriculture (USDA) strives to improve the quality of life for those living in rural areas by offering flexible financing requirements for low-to-moderate income families who wish to move to small towns or rural communities. USDA mortgages are unlike other lending programs with no required down payment or closing fees – the closing fees can be paid with a gift or rolled into the loan. The USDA lending guidelines are unlike other lending programs as are their gift guidelines.

Basic gift rules for USDA loans:

  • The gift funds must be left in the gift donor’s bank account.
  • The gift donor cannot be a part of the future household or be a party to the mortgage loan.
  • A cash gift requires a gift letter.
  • Gifts of equity are allowed.

Other Key Points to Remember

No matter which type of loan you are using, there are some common rules to keep in mind when giving or using a gift to help buy a home:

  • Gifts are only acceptable for the purchase of a primary home or second home.
  • All gifts need to be sourced. For example, if you are gifting or receiving a gift the lender will request: a gift letter which states the gift is not a loan and no repayment is expected, a copy of the bank statement the funds have originated from and a bank statement showing the funds have been deposited into your account. Be prepared to offer more documentation should the lender request additional proof of funds.
  • When receiving or gifting equity, the details of the gift (i.e., amount of equity given) must be outlined on the purchase (or sales) contract.

Gifts are a great way to help you purchase your first home or vacation home. When donating or receiving a mortgage gift, be sure and speak with your mortgage professional regarding all necessary steps.

Finally, there may be tax implications associated with mortgage-related gifts. Talk with a financial advisor or tax professional to learn more.

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All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Guaranteed Rate, Inc. does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Guaranteed Rate, Inc. Guaranteed Rate, Inc. its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.

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