You're planning on buying a home in the new future when your lease is up. You don't have much saved for a down payment due to recently getting married. So you're considering asking a family member for a gift for your down payment.
You might think that you can just use whatever financial gifts your friends and family give you for a down payment, but using gift money is not as cut and dry as you might think. Whether you have $20 or $20,000, the source of the funds in your bank account will matter just as much as how much money you actually have. To understand why the source of your funds matters to your mortgage company in Utah, you’ll first need to understand underwriter guidelines are and how they will impact your ability to qualify for a home loan.
Underwriting refers to the process in which your mortgage lender looks at your credit score, income and assets to assess your risk and if that risk is acceptable to lend you money to purchase a home. When underwriters look at your assets, they check to make sure that the money in your account is indeed your money – they want to make sure any large deposits (other than something regular like your paycheck) are your actual assets. This includes making sure any deposits in your account from friends and family that you plan to use for a down payment are gifts, not loans. They will require an explanation of any out of the ordinary deposits during the two months proceeding the closing on your new home.
This is essential to ensuring that you can actually afford your mortgage payment and that you’ll be likely to pay the loan back. If you used a personal loan to qualify for a home loan, chances are you’d be left with a big financial mess once you had to start paying both loans back.
So how can an underwriter establish that deposits in your bank account are gifts and not loans? They’ll need the gift-giver to write a gift letter. Let’s take a look at what that means.
As it applies to your mortgage, a gift letter is a note from the donor that says you don’t have to pay the money back. If you’re using gift money as part or all of your down payment, you’ll need the donor to write a gift letter to your mortgage company that makes it clear that the money is a gift and not a loan. Here’s what your gift letter should include:
The donor’s name, address and phone number
The donor’s relationship to the client
The dollar amount of the gift
The date the funds were transferred
A statement from the donor that no repayment is expected
The donor’s signature
It’s important to understand that the gift letter in itself may not be enough evidence for the mortgage company. If you’re getting an FHA loan, the person who gives you the funds will be required to provide a bank statement in addition to a gift letter – so you’ll probably want to let your generous friend or relative know this upfront.
One thing to consider is that the amount of gift money you use in relation to how much of your own money you put down may impact what kind of loan you can get. Here are some rules about gift money as it relates to different types of properties.
Keep in mind that these rules are subject to change based on lending regulations – so check with your mortgage broker for up-to-date guidelines.
If you’re getting a primary residence, you can use gift funds for your down payment. These guidelines apply:
If it’s a single-family home, you can always use gift funds without having to contribute any of your own money to your down payment.
If it’s a multi-family home, you can get a home without having to contribute to the down payment as long as the down payment is 20% or more. If your down payment as 20% or less on a multi-unit home, you have to contribute at least 5% of your own funds to your down payment.
If you’re getting a second home through a conventional loan (you can’t get them through the FHA, USDA or VA), the following guidelines apply regarding gift limits:
If you’re making a down payment of 20% or more, all funding for the down payment can come from the gift.
If it’s less than 20%, 5% of your down payment must come from your own funds.
Most Utah brokers and lenders require a 60-day history of assets for qualification purposes. As long as you have documentation for the past 60 days, your mortgage company can take it from there.
So, within that 60-day period, which deposits do you have to worry about getting a gift letter for?
You just got married. Aunt Sue gave you a $75 check, but Grandma Betty gave you $10,000 for tying the knot. Will you need gift letters for both deposits?
In general, your underwriter will need to verify the source of any large deposit. What’s the criteria for “large deposit”? It’s any single deposit that exceeds 50% of the total monthly qualifying income. This is for conventional, VA and jumbo loans. For FHA and USDA loans, a large deposit is defined as any deposit that is greater than 1% of the adjusted purchase price or appraised value, whichever is lower.
Let’s say you are doing a conventional loan for our example. If you make $4,000 a month, any deposit over $2,000 would probably be questioned by your underwriter. Therefore, the underwriter will probably want to verify that Grandma Betty’s $10,000 gift is a gift, not a loan, so you’ll need to ask her for a gift letter. Aunt Sue’s gift, however, is small enough that the underwriter might not question it.
Of course, this is partially up to the underwriter’s discretion. If there are any deposits that seem to be out of the ordinary, your underwriter may question them regardless of your income. If you normally had $2,000 in your checking account and you suddenly have a deposit for an extra $8,000, they would want to verify that regardless of the purchase price/appraised value or qualifying income. We would dig deeper into that situation, just to make sure the situation checks out. While your Aunt Sue’s small gift might not be questionable in itself, if the underwriter finds that it’s out of the ordinary, he or she may require gift documentation.
Now that we’ve gone over the basics of gift funds, we’ll answer a few of your common questions.
There’s no limit to the amount of money that someone may gift for a house. However, you may or may not have to report the gift on your taxes. We’ll go over the limits for that below.
Similarly, there are no limits on how much someone can give you for a mortgage down payment or closing costs. The only stipulation is that mortgage investors may require you to contribute a portion of their own funds to the down payment depending on the loan and property type. Those guidelines are outlined above.
Tax laws change on a fairly regular basis and you should always speak with your financial advisor or tax professional in order to make sure you’re in compliance with the most current law.
Typically, this tax is paid by the donor. If you agree that the recipient will pay the tax, talk to your tax professional.
If you know that you’ll be getting any financial gift to help with your down payment, be prepared to document it for your mortgage company. Do you still have questions about using gift money for your down payment? Get started online or give us a call at (801) 272-0600 to speak with one of our Mortgage Loan Advisors!