There are obstacles to homeownership that range from mental blocks to very real barriers. Many people simply do not believe they can own a home. We get inquires every day from individuals that want to know where to begin the homeownership process as well as what their chances are of getting a home loan. It’s important to understand that homeownership doesn’t happen overnight. First, you need to mentally prepare yourself for a somewhat extensive process accompanied by examinations that may try your patience. Next, you need to make sure that you’re in the best financial shape that you can possibly be in. However, even if you’re not in great financial shape right now, it doesn’t mean that you cannot become a homeowner. You may have more financial conditioning to do but if you are willing to be disciplined with your finances and stay dedicated to the dream of homeownership, you will become a part of the approximately 64% of Americans that own their very own home.
Down payment. Next to credit scores, the second highest obstacle reported to us by potential buyers is funds for a down payment. When applying for a home loan, you can expect to have expenses such as the down payment, closing costs/prepaids, inspections, appraisal, and/or a survey.
In a world that has online funding platforms, you may think it’s as easy as posting your homeownership dream online. Unfortunately, online funding is NOT an acceptable means of receiving gift money from family and friends. In fact, you can forget your friends participating in your gift funds – it’s not allowed. Also not allowed to gift you money – your real estate agent, builder/developer, lender, or anyone with an interest in your loan or home purchase. So now you know what’s NOT allowed. Let’s get in to what IS allowed.
Gift funds are all about family.
- Any other person related to you by blood, adoption/legal guardianship, domestic partner, or marriage
- Additionally, it may be acceptable to receive gift funds from employers, charitable organizations, and/or government agencies
Individually, a family member can gift you up to $14,000 without incurring a gift tax. Married family members, filing taxes jointly, up to $28,000.* Funds should be gifted at least 60 days before applying for a home loan. If receiving gift funds from more than one person, funds should be given in the form of a bank wire or check and should be deposited individually. Do not save the checks up and then deposit them together. This will save you a headache with your lender later. Oh but wait, there’s more.
Gift funds must also come with gift letters that include the following:
- Donor Full Legal Name
- Donor Address (that matches bank statement)
- Donor Phone Number
- Donor Relationship (to you)
- Gift Amount
- Date funds were deposited in your bank account (See! This is why you deposit each check individually.)
- Statement that “no repayment is expected” (it’s a gift!)
- Donor Signature
- Address of house being purchased (if you know it)
- May (likely – hint, hint – unless it’s a VERY nominal amount) need donor’s bank statement showing the cleared check to you
When using gift funds, it’s very important that you communicate that to your lender in the early stages of your home loan application process. Lenders have their own policies and procedures about gift funds that are based on the type of loan you are applying for. Below you will find general gift-funding rules for the most common types of home loans.
- CONVENTIONAL. If you are putting more than 20% of the purchase price down, all of the funds can be gifted. If it’s less than 20%, some must come from you. Gift funds can be used on second and primary homes, but not investment or income-producing properties.
- FHA/VA. If your credit score is higher than 620, all of your funds can be gifted. If your credit is in between 580-620, then 3.5% (or more) of the down payment must be your own money. Gift funds can only be used on primary homes.
- USDA. 100% financing is offered on qualifying homes in qualifying areas so you won’t have a down payment. BUT, donors can assist with closing costs should you not be able to finance them in to the loan (in cases where the appraised value is not higher than the sales price).
*Please note: Gift funds are subject to individual lender/bank’s policies and procedures. You should always be sure to consult with them about the possible use of gift funds. Additionally, gift funds may affect the donor’s taxes. Donors should seek tax and/or legal advice to fully understand their accountabilities and costs.