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Gift Giving and Home Loans: A Guide to Giving (and Receiving) Cash Help on Down Payments, Prepaid Items, and Closing Gifts

We are officially in gift-giving season. The post-Thanksgiving Black Friday, “Cyber Monday” scrum turns eyes to shiny-new electronics, toys, gadgets, clothes, and retail shelves.

The November-December shopping season is a boon for retail sales and a boost on U.S. economic activity. Retail sales account for up to 70% (by some estimates) of U.S. economic activity (as measured by GDP), and the fourth quarter is typically the busiest season.

One thing that might not appear on the average Black Friday shopping list – but something that is infinitely more permanent – is giving a cash “gift” to help your relative buy a house.

Gift guidelines are carefully regulated by lenders. A mortgage is a large commitment, and lenders need to ensure that borrowers can repay the loan, but also that they will repay the loan.

Life Guard StandA down payment represents “skin in the game” for the borrower, and removal of that initial buy-in makes the loan riskier. This is why lenders charge a monthly mortgage insurance fee for conforming loan down payments under 20%, and it is why they have strict “gift” guidelines for relatives. Lenders also want to make sure that the “gift” isn’t actually a “loan,” which can complicate the borrowers ability to repay their mortgage.

In this article, we will go through gift-giving guidelines for conventional, FHA, USDA, and VA financing, four of the most popular loan programs.

Readers interested in giving or receiving a gift should also read this article by Dan Green of the Mortgage Reports to make sure that they are following the correct process with the correct records. Lenders will require very thorough documentation of every action and step involved.

Call us at 805.543.LOAN with any and all questions.

 

Conventional Finance

Home for SaleThe 30-year fixed and 15-year fixed are examples of popular conforming finance programs. “Conforming” or conventional finance refers to “industry standard” loans as laid out by federal mortgage insurers Freddie Mac and Fannie Mae.

Gift eligible: YES

1. Size restrictions: YES; borrowers must contribute 5% of their own funds when the down payment is less than 20%. The 5% threshold is calculated by the total loan amount plus the closing costs and prepaid items. Restriction not applicable when the gift is entire 20% down payment.

Seller credits can be applied towards closing costs and prepaid items, but not towards minimum down payment.

(Note: down payments less than 20% are subject to mortgage insurance. See here for guidelines).

2. Family restrictions: YES; gift must come from a family members, as defined by blood or legality. Friends, fiancees, or parents of a fiancee are not applicable. Seller can contribute to closing costs and prepaid items.

 

FHA Loan

Real estate for saleWith lenient down payment and qualification standards, the FHA loan program was created by the government to help more first time and middle income borrowers purchase a home.

Gift eligible: YES

1. Size restrictions: NO; borrowers can receive any amount of down payment as a gift (minimum down payment requirement is 3.5% of the sales price).  Any gift amount can be applied towards down payment, closing costs, and prepaid items, and borrowers not required to invest any of own money.

Seller credits can be applied towards closing costs and prepaid items, but not towards minimum down payment.

2. Family Restrictions: YES; gift must come from a family members, as defined by blood or legality. Friends, fiancees, or parents of a fiancee are not applicable. Seller can contribute to closing costs and prepaid items.

USDA Loan

Country Ranch LandThe USDA loan is backed by the United States Department of Agriculture’s Rural Development Administration. Developed to improve the quality of life and economy in rural areas, the USDA loan is limited by both income (up 115% of median income in area) and town size (up to 25,000 at most, restrictions apply).

Gift eligible: YES

1. Size restrictions: NO; borrower can receive entire down payment as a gift. Note: USDA is 100% finance eligible, meaning no down payment is required.

Seller can contribute to closing costs and prepaid items.

2. Family Restrictions: YES; gift must come from a family members, as defined by blood or legality. Friends, fiancees, or parents of a fiancee are not applicable.

VA Loan

CA and USA FlagsThe VA loan is backed by the Veteran’s Administration. Designed to make housing affordable for military veterans and their families, the VA loan offers low mortgage rates, up to 100% financing, no mortgage insurance, and a 2.15% financing fee for loans up $417,000.

Gift eligible: YES

1. Size restrictions: NO; borrower can receive entire down payment as a gift. USDA is 100% finance eligible, meaning no down payment is required.

Seller can contribute to closing costs and prepaid items.

2. Family Restrictions: YES; gift must come from a family members, as defined by blood or legality. Friends, fiancees, or parents of a fiancee are not applicable.

 

Central Coast Lending is a leading mortgage broker and lender on the California Central Coast. Our expert team of loan officers make the process of mortgage finance (or refinance) easy and understandable. Call us at 805.543.LOAN or email us at info@centralcoastlending.com with any questions. 

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805.543.LOAN info@centralcoastlending.com