It’s not just FHA loans that allow gift funds for their down payments as low as 3.5%. Fannie Mae, too, is fine with gift funds to cover all or a portion of a borrower’s down payment.
This helps overcome the hurdle that is the 20% down payment of conventional loans especially those conforming to Fannie Mae’s standards. From minimum borrower contribution to documentation, learn more about Fannie Mae’s rules on using gift funds for down payments.
Fannie Mae’s Gift Funding Rules
Down payment is and remains a hurdle to the home buying process, as confirmed by NeighborWorks America’s recent National Housing Survey. But what’s worrying is that not all consumers are aware of down payment assistance programs and other home buying help.
For instance, gift funds can be used for down payments on FHA, VA, USDA, and conventional loans. In the case of Fannie Mae who purchase conventional loans that meet conventional standards, these gift funds can also go toward closing costs and financial reserves, as applicable.
Fannie Mae considers these people as eligible to provide gift funds to a borrower:
- A relative – borrower’s spouse, child or dependent. Or any other individual related to the borrower by blood, marriage, adoption, or legal guardianship.
- Fiance, fiancee, or domestic partner.
None of these donors must be affiliated with an interested party to the sale transaction — builder, developer and real estate agent.
All or Some of the Down Payment
Gift funds can be applied to down payments primary residences and second homes. They are not allowed on investment properties.
As to whether all or a portion of one’s down payment can be covered by gift funds, Fannie Mae has this to say:
1. If you put 20% or more of the purchase price as down payment on a principal residence or a second home, all funds to complete the transaction can come from gift funds. There is no minimum borrower contribution so you don’t have to contribute from your own pockets.
2. If you put less than 20% of the down payment on an one-unit principal residence, no minimum borrower contribution is also required. All funds to complete the transaction can be covered by the gift funds.
For two-to-four-unit primary residences and second homes, you are required to make a 5% minimum borrower contribution. After this minimum borrower contribution is met, gift funds can supplement the down payment, closing costs and reserves.
With respect to HomeReady™ – a 3.0% down payment program for first-time homebuyers – the following guidelines will apply:
- For one-unit properties, no minimum borrower contribution is required but the minimum down payment is 3%.
- For two-unit properties, the minimum borrower contribution is 3% and minimum down payment is 15%.
- For three-to-four-unit properties, the minimum contribution is 3% and the minimum down payment is 25%.
Documenting Gift Funds
Lenders will check the sufficiency and availability of the gift funds. They will also document the transfer of funds from the donor to the borrower or from the donor to the closing agent, as applicable.
- To establish the paper trail from donor to borrower, copies of: the donor’s check and borrower’s deposit slip, the donor’s withdrawal slip and the borrower’s deposit slip, the donor’s check sent to the closing agent, or settlement statement showing receipt of the donor’ check.
- To establish the paper trail of funds not transferred prior to the closing date, copy of: the donor’s certified check, cashier’s check or any other official check that he/she sent to the closing agent.
Yes, down payments are a hurdle but there are many ways to get past it or at least alleviate the situation. Consider gift funding for the down payment on your first home.