Coming up with a large enough down payment is often the hardest part of securing a mortgage. Luckily, most of the loan programs allow you to use gift funds as a part of your down payment. In fact, some programs even allow 100% of the down payment to be a gift.
Keep reading to learn how each program works.
What is a Gift?
First, let’s define what underwriters consider a ‘gift.’ When you apply for a mortgage, lenders will ask to see your bank statements for the last 60 days. On those statements, underwriters will look for large deposits that don’t coincide with your income. If you have any deposits that the individual underwriter sees as a ‘red flag,’ they may ask for more details on it.
What an underwriter considers a large deposit is up to their personal discretion. For example, if you bring in $3,000 each paycheck, but you have a deposit of $5,000 last month, an underwriter will likely ask about it. On the other hand, if you have a deposit of $300, you may not have to verify its origination.
If an underwriter questions the origination of a deposit, you must prove where it came from with documentation. For example, did you sell an asset and deposit the funds in your checking account? You can simply provide the underwriter with proof of the sale of the asset, such as stocks, and the deposit ticket for the matching deposit. The dollar amounts must match to the penny, though, in order for an underwriter to accept it as valid documentation.
If you did receive gift funds, you’ll have to prove that the funds are a gift and not a loan. You can do this with a Gift Letter. Your donor simply writes a letter that states the purpose of the gift, the amount, and that they do not expect repayment of the funds.
The donor may also have to provide a paper trail of the origination of their funds to provide the gift. Typically, a bank statement can provide the necessary proof, but if the underwriter suspects that there is a loan somewhere down the line, they may require proof of the funds’ origination as they would if the money were in your account. Again, providing proof of the sale of any assets or even a copy of a check from a bonus or tax refund will work as long as the dollar amounts match exactly.
The Gift Funds Limit
Now, let’s look at the important stuff. What is the dollar amount limit that a donor can provide? Because you don’t need a down payment for VA or USDA loans, they don’t have limits, but conforming and FHA loans do have limits.
- FHA loans – The FHA is generous and allows you to receive 100% of your 3.5% down payment as a gift. You don’t have to include any of your own funds in the down payment.
- Conforming loans – If you qualify for a conforming loan, you may have to provide some of your own down payment. Unless you have a 20% down payment, the underwriter will require you to provide some of your own funds as part of the down payment. If you can receive a 20% gift for the down payment, though, you don’t have to provide any of your own funds.
Qualifying for a Loan
Keep in mind that even with gift funds, you still have to prove that you can afford the loan. The down payment is just a small part of the approval process. You must prove that you meet the minimum credit score and maximum debt ratio requirements, which for FHA and conforming loan are as follows:
- FHA loans – 580 credit score, 31% housing ratio and 41% total debt ratio
- Conventional loans – 680 credit score, 28% housing ratio and 36% total debt ratio
This is in addition to any overlays each lender has for their loan programs. You may find that you want to shop around to look for the best deal for you and your financial situation.
If you have access to gift funds, make sure you explore your options with either FHA or conventional loans. As long as you follow the lender’s rules regarding gift funds, you should be able to use them for your loan qualifications.