First let us look at the gifting guidelines for a FHA purchase. If a homebuyer wants to go buy a home through FHA he or she typically needs to put down 3.5% of the purchase price from their own funds in order to satisfy the minimum down payment requirement. If Aunt Betty wants to help out nephew John with the gift of down payment, she can gift 5% of the purchase price and lucky John can do 95% financing without digging into his own pocket. Please keep in mind that Aunt Betty will have to show the source of funds of her gift and nephew John will have to properly show receipt of the money. The gift money cannot be from under Aunt Betty’s mattress and she will have to sign a gift letter saying she does not expect any type of repayment. In an ideal world nephew John could now go buy the home and be on his way.
Unfortunately real estate transactions usually are not so simple. Thanks to items called pre-paid escrows and closing costs, the bottom line for the buyer usually will take more than just the 3.5% down payment required by FHA. Two other ways that we can remedy this situation for the buyer is to have seller paid closing costs and lender paid closing costs. If John is out looking for a home that a seller wishes to sell for $200,000 he can offer the seller $205,000 with $5,000 seller paid closing costs. This structures the financing with less money coming out of John’s pocket and still provides the same net proceeds for the seller. Another method less used is for the lender to pay closing costs. If the prevailing interest rate is 5%, the lender can price the loan at 5.25% or 5.5% and use the extra yield spread premium to pay some costs.
Looking at conventional financing through Fannie Mae or Freddie Mac, in order for the borrower to qualify with pure gift they must receive 20% in gift! That’s a lot of money. If the buyer has 5% of their own money to show they can receive little gifts here and there that are a much smaller percentage of the total cost. One way of gifting that I often encourage is on a much smaller scale. Whenever we are qualifying a buyer we always have to show a paper trail of source of funds for cash to close. We show the paystub going to the bank account which eventually becomes either escrow deposit or cash to close or reserves. What I say to the borrower is save every dime and let the family help out with things like food and gas and living expenses. This will help the homebuyer save quicker and get into a position of home ownership quicker without fouling up the paper trail for the lender. The family is happy to contribute on a smaller scale without giving nephew John a free ride.
Considering the $8,000 First Time Homebuyer Tax Credit, the grateful new homeowners will be in a good position to reciprocate the joy of gifting by having a few family gatherings over their place next year.
Written by Preston Ware
First South Mortgage
Email is firstname.lastname@example.org.