Conventional loan gift funds: The easiest way to help

Did you know gift funds can pay for the down payment and closing costs.

Money in a gift boxGift money is an excellent source of funds to use for your down payment and closing costs on a home purchase.

But if someone gives you money as a gift, there are some rules you should follow to make sure that the money goes toward the down payment or closing costs.

First, make sure that the gift is unconditional. This means that you don't need anything in return, other than the satisfaction of knowing that you helped someone achieve their dream.

Gift money is a great way to get money for a down payment and other costs when you buy a home.

Gift Fund Guidelines for Conventional Loans

A conventional mortgage loan is a loan that is not insured by FHA, VA, or any other agency. Conventional loans can also be referred to as “non-government” loans. There are several gift fund guidelines that you should follow if you plan on using gift funds for your down payment and/or closing costs. First, make sure that the gift is unconditional. This means that you don't need anything in return, other than the satisfaction of knowing that you helped someone achieve their dream.

Acceptable Gift Fund Sources

Gift funds must come from an acceptable donor. The Federal National Mortgage Association (Fannie Mae) permits the following individuals to gift money:

A relative is someone who is connected to the borrower through blood, marriage, adoption, or legal guardianship. Or a domestic partner, fiancé, or fiancée.

It is prohibited for the donor to be the builder, the developer, the real estate agent, or any other interested party in the transaction, nor can they have any association with any of these parties.

Contribution Requirements from the Borrower

Before, the borrower/home buyer had to put up 5 percent of their own money along with the gift money to pay for the house. Federal Home Loan Corporation (Fannie Mae and Freddie Mac) got rid of this rule, which is good news.

The donor can now contribute some or all of the funds to assist the borrower with the purchase. The gift fund standards include a few minor exclusions. Regardless of the down payment, the regulation change allows for limitless gift monies. The modification affects primary residences and second houses with one to four units.

For two- to four-unit principal residences and second homes, the borrower must provide a minimum of 5 percent from his or her own assets if the down payment is less than 20 percent (5 percent to 19 percent).

Gifts can be used to augment the down payment, closing expenses, and reserves once the minimum borrower contribution has been satisfied.

Lenders Require a Verified, Detailed Gift Letter

Most lenders require a verified, detailed gift letter. This letter must be signed by the donor and the borrower, and it must be sent to the lender with your mortgage application.

The lender will review the letter and verify the amount of funds that were given as a gift to the borrower, and then disburse those funds to the borrower at the closing table. The letter should contain the following information:

Gifts must be accompanied by a gift letter, which must be signed by the giver. The gift letter should include:

  • define the gift's dollar value
  • the date of the transfer of funds
  • contain a statement from the donor saying that they don't expect anything in return. And
  • Name, address, phone number, and relationship to the borrower of the donor.

The following requirements must be included when borrower's own financial resources are joined with the gift from a family member or domestic partner in order to make up the required minimum cash down payment:

  • A letter confirming that the donor has lived with the borrower for the last year and will in the new home.
  • Documents demonstrating a history of joint habitation between the borrower and the donor. Donor and borrower addresses must match. A copy of a driver's license, a bill, or a bank statement are all examples of acceptable documents.
  • Lenders will provide a blank gift letter to help with the transfer.

Gift Fund Verification and Transfer

Parents writing a check for gift moneyThe lender must verify that the donor's account has sufficient cash or that those amounts have been transferred to the borrower's account. Acceptable documentation includes the following:

  • a copy of the check from the donor and the deposit slip from the borrower
  • give the closing agent a copy of the donor's check, or
  • a receipt for the donor's check on a settlement statement
  • a copy of the withdrawal slip from the donor and the deposit slip from the borrower

If the funds are not transmitted prior to settlement, the lender must demonstrate that the donor delivered the closing agent a certified check, a cashier's check, or another formal check.

Don't Commit Loan Fraud

Gift funds cannot be a loan between the donor or borrower. In fact, it's a crime to borrow money and use the gift funds. The reason for this is that when you give someone a gift, you don't expect to get that money back.

Typically, we offer gifts to someone we care about, and we would not want them to feel obligated to repay us for our kindness.

Using Your Gift Money With a Conventional Loan

Fannie Mae and Freddie Mac graphicIf you receive gift funds for your down payment and/or closing costs, you may be wondering how you can use the funds with a conventional loan.

Conventional loans are available to the majority of borrowers and are not guaranteed by the federal government.

A conventional loan is not as difficult to obtain as many people assume. The key to qualifying for a conventional loan is to make sure that you have a strong credit score, good income, and sufficient money for a down payment and closing costs. If you have gift funds that you're using for your down payment, you must have a plan for when you will use those funds. With a conventional loan, you can use gift funds for your down payment and closing costs if you follow the gift fund guidelines listed above.

Investment Properties and Gift Money

You can't use gift money to put down on an investment property. Most of the time, if you want to buy real estate to make money off of it, you'll have to pay for the down payment with your own money. Learn about Investment Properties

Second Homes and Gift Money

Second home on a beachJust to recap, gift funds and a second home purchase. 

There is no requirement for a minimum borrower contribution from the borrower's own cash. All monies required to complete the transaction can be provided as a gift when the down payment is greater than 20%.

If the down payment is less than 20% (5%, 10%, 15%), the borrower must provide at least 5% of their own money. After the minimum borrower commitment, gifts can go toward the down payment, closing costs, and reserves. Learn about Second Homes

Is a Gift for a Home Purchase Taxable?

IRS reporting formsIRS does have a requirement for gift tax over annual exclusion. As of 2022, the annual exclusion is $16,000. If the gift exceeds the annual exclusion, and the donors are the parents of the borrower, the parents can simply write two checks to the home buyer. That covers up to $32,000. 

Read more at Lawyers.com.

Conclusion

In conclusion, a gift fund can be a great way to get a conventional loan. It can help you avoid having to provide a large down payment or pay for private mortgage insurance. However, it's important to understand the rules and regulations of using a gift fund to get a loan. Be sure to consult with a loan officer to find out if using a gift fund is the right option for you.

Resources

Fannie Mae Gift Requirements. B3-4.3-04, Personal Gifts (10/07/2020), selling-guide.fanniemae.com,https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-4-Asset-Assessment/Section-B3-4-3-Verification-of-Non-Depository-Assets/1032991211/B3-4-3-04-Personal-Gifts-10-07-2020.htm. Accessed 20 May 2022.