We get tons of questions from first time home buyers who are buying their first home. Some of them realize that they will need some help with the cash needed to buy a home, and they are getting gifts from family. Documenting Gift Funds to close on your first home can be tricky.
If you receive the gift funds in April (for instance) and you are not purchasing the home until August – then the money will have “seasoned” in your account, and very little documentation is required… but let’s say that you are getting the money pretty close to the time of loan approval, then we have a TON of documentation to do.
Most lenders require 2 months of bank statements these days. That means all pages of the bank statement, not just the first page showing the balance. If you receive the money now, in April, then your April statement will show the large deposit, and raise questions. Your May and June statements will start with the larger balance, and those funds will be assumed to be your own.
Regardless, the gift from your family should really be a gift in either case, and not a loan pretending to be a gift.
One of the primary obstacles we have faced in the past few years to loan approvals has been verification of funds for closing; specifically not properly documenting gift funds from relatives. While it is common sense for a home buyer to think, “hey they want to give me money why can’t I just take it and put it in the bank? What does the bank care?” In the “old days” one of the major fraud factors was when a Seller actually gave cash to a borrower to close, disguised as a “gift” from family. Because of this, Investors are very diligent about documenting gift funds. We’ve seen transactions delayed and relationships strained as we try to get the proper documentation of gift funds.
There are two steps to this equation: first the underwriting requirements when gift funds are involved and second the actual documentation required for gift funds to be accepted by underwriting:
Fannie Mae and Freddie Mac allow gift funds for all transactions. In a NEW Guideline Update in 2014, all of the buyers funds from closing CAN come as a gift from a Family member, a Fiance or a Domestic Partner! Many Loan Officers are not aware of this change, so call us (919 649 5058) with questions about Fannie Mae 5% Down Payment coming from Gift Funds.
This is especially important for those who want to buy New Construction homes that are over the new FHA Loan Limits (they went down in 2014 all across NC) and / or find a new home that is outside the USDA Home Loan footprint!
FHA and USDA have no minimum requirement for cash that MUST come from the borrower. If parents, or relatives, want to gift all the funds needed for down payment and closing costs that is permissible.
The transfer of gift funds must be carefully documented to prove the funds deposited into your account constitute a gift and that you have not borrowed the funds from another source and therefore will have a payment the lender would need to show a payment for in income to debt calculations. When you are using Grant and or Gift Funds for the documentation is very simple:
- Name, address, phone number and relationship of donor on application under the assets section
- Proof the donor has the ability to provide the gift, i.e. copy of bank statement with donor’s name on it
- Evidence of the transfer: copy of check from parents, wire confirmation, transfer if you both have the same institution (i.e. credit union account to credit union account)
- Evidence funds have been deposited into your account
About cashier’s checks… We used to be able to use a cashier’s check as evidence of ability to give the gift and by-pass the copy of the donor’s bank statement. Most lenders will no longer accept the cashier’s check as proof unless the bank provides a letter stating the cashier’s check was purchased with funds from the donor’s account. The purpose is so someone can’t take cash, buy the cashier’s check and type the donor’s name on it as purchaser.
Keep in mind gift funds do not only apply to purchase transactions. In this market environment we have also had gift funds involved in refinance transactions to pay down principle balances, pay closing costs or bring taxes current. These funds need to be documented the same as on a purchase.
Have questions about cash needed to close and closing costs, or how the 3% down payment assistance program from the State of NC works? Call Steve and Eleanor Thorne about your particular situation at 919 649 5058. Remember – you might qualify for a Single Parent Grant to purchase a home in NC!