MarketWatch: Don’t Let Down-Payment Gifts Delay Mortgage Loan
December 19, 2011
Coming up with a down payment is often a first-time home buyer’s biggest challenge.
That’s why many of them get a little help from relatives or friends. In 2010, 27% of first-time buyers received a gift from a friend or relative to use toward their down payment. That’s up from 22% in 2009 and 23% in 2005, according to statistics from the National Association of Realtors.
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“Attitudes have changed regarding down payments. During the boom, 100% financing was common. Now, people are getting used to the fact that they have to put more money down to qualify,” said Russ Martin, branch manager and mortgage adviser for PERL Mortgage in Chicago.
A typical 10% down payment on a home in Chicago could be up to $30,000 or $40,000, he said. Most of his clients are putting at least 10% down these days, and half make a 20% down payment.
While some buyers are able to get Federal Housing Administration mortgages with down payments as low as 3.5%, others don’t have that luxury, said Rande Bronster, a real-estate agent with Zip Realty in Los Angeles. Bronster recently had two clients who decided to buy in condo complexes that weren’t FHA-approved. If they wanted the homes, they were going to have to come up with more cash.
“They all have had enough income and they’ve saved some money, which is not easy for anyone to do, young or old,” she said. “Most of them don’t think they have to borrow.”
Many times a gift will allow a buyer to make a down payment without severely depleting their savings — a big plus in an uncertain economy. Most lenders will require borrowers to have some money in the bank after closing. And some parents would rather their adult children keep saving for a rainy day than use all of their funds to make a down payment.
For the giver, there can be some tax implications to large gifts, and they should check with their accountant about their specific situation.
For the person buying the home, here’s what you should know to make your closing process as smooth as possible.
1. You may need to put down some money of your own
One important point for loans backed by Freddie Mac: When the loan-to-value is greater than 80%, if a relative gives a gift to help out with the down payment, then the buyer also needs to cough up at least 5% of the purchase price from his own funds, according to Brad German, a spokesman for Freddie Mac. There are additional restrictions when the related person is the seller, German said. Gifts are not allowed for mortgages on investment properties.
The 5% requirement gets dropped in other gift situations, such as when the gift comes from an agency as part of an agency program, German said.
For FHA mortgages, the entire 3.5% down payment can be a gift, Martin said.
Fannie Mae allows all down-payment funds to come from gift sources for loans on one-unit principal residences.
Here’s what’s tricky: Few people know whether the loan will get sold to Fannie or Freddie. “Their lender is the ultimate decision maker on whether to make a loan” and what the down-payment requirements will be, said Andrew Wilson, Fannie Mae spokesman.
2. Gift documentation is a must
When using a gift as a down payment, it must be properly documented.
“If I have a borrower who has $10,000 in their bank account and see there’s a $5,000 deposit, I want to know where that money came from,” Martin said. But there have been cases when even smaller amounts have caused a hiccup in the loan-approval process.
A gift letter should be signed and dated and include the donor’s name, address and telephone number, along with his or her relationship to the borrower, according to Total Mortgage Services, a mortgage lender. The letter should also include the address of the property being purchased, the dollar amount of the gift, when the money was transferred, and a statement that it is, in fact, a gift and no repayment is expected.
Documenting gifts can become difficult in cases of many small donations. Consider, for example, the newly married couple who will be using a number of cash wedding gifts in their down payment. While sometimes a letter of explanation and a marriage certificate will suffice, other times lenders figure they’re safer if they require more thorough documentation.
One way lenders can help newlyweds with their down-payment gifts is through down-payment gift registries. Some also come with perks: The bridal registry program at Bozzuto Homes, a home builder, offers a gift match of up to $15,000 for use in closing costs or upgrades to the home being built, said Bruce Rosenblatt, director of sales for Bozzuto.
3. You don’t need to document ‘seasoned’ gifts
Once a gift has been parked in your bank account for three months or more, it’s considered “seasoned,” and therefore doesn’t need a gift letter to explain it, Martin said. At this point, the money is considered yours and a gift letter becomes irrelevant.
Bronster recommends that buyers who know they will need a gift to make their down payment get the money at least a few months in advance to eliminate worry about proper documentation.