Introduction
Gift Funds
When buying a home to live in or as a second home, you can use money given to you as a gift to help pay for some of the costs. These costs can include your down payment (which is part of the purchase price you need to cover upfront), the closing costs (which are various fees and expenses you need to pay to finalize the mortgage), or money set aside to show you can afford future payments, known as financial reserves. However, if you’re buying a property as an investment to rent out, you cannot use gift money. It’s also important to note that while you can use a gift for many expenses, a specific type of gift known as a “gift of equity” can’t be used as financial reserves. For more information on gifts of equity, you can refer to another section, B3-4.3-05, Gifts of Equity.
Acceptable Donors
The person giving you the gift must be someone closely related to you, like a spouse, child, or someone else dependent on you. They can also be related by blood, marriage, adoption, or legal guardianship. If the person giving you the gift isn’t related, they must still have a family-like relationship with you. This includes a domestic partner (or their relative), someone engaged to marry you, a former relative, or a godparent. Importantly, the gift cannot come from someone involved in the sale, like the builder, developer, real estate agent, or any other party with a vested interest in the transaction. However, if the seller is giving you the gift and they’re not involved in any other way, it’s allowed. Gifts of equity, where the seller reduces the purchase price as a form of gift, are also permitted under certain conditions. For gifts from organizations, like grants, see B3-4.3-06, Grants and Lender Contributions.
Minimum Borrower Contribution Requirements
Depending on the loan-to-value ratio (a measure of how much of the home’s price is financed through the mortgage), there are different rules for how much of your own money you need to contribute to the purchase. If the mortgage is for 80% or less of the home’s price, you don’t need to use any of your own money for a one- to four-unit home you’ll live in or a second home. All the money can come from a gift. If the mortgage covers more than 80% of the home’s price, the requirements change. For a one-unit home you’ll live in, you still don’t need to use any of your own money. But for a two- to four-unit home or a second home, you must use at least 5% of your own money. Once you’ve met this requirement, additional costs can be covered with gift money. For specific types of loans, like the HomeReady mortgage, different rules for minimum contributions and down payments apply, as outlined in B5-6-02, HomeReady Mortgage Underwriting Methods and Requirements.
Documentation Requirements
To use gift money, you need a letter from the person giving you the gift. This letter needs to say how much they’re giving you, clarify that you don’t have to pay it back, and include their contact information and how they’re related to you. If the gift is coming from a trust or an estate belonging to an acceptable donor, that donor must sign the letter and include the trust or estate’s name. If the amount of the gift changes from what was initially stated, your lender might have to re-evaluate your loan application. The lender must also check that you have enough money for all necessary payments at closing. If you’re combining gift money with your own for the down payment, you’ll need a special statement if the donor has lived with you for the past year and will continue to do so. You also need to provide proof of your shared living situation, like a utility bill or bank statement showing the same address.
Verifying Donor Availability of Funds and Transfer of Gift Funds
Your lender must make sure the person giving you the gift has enough money to give the stated amount. This can be done by checking their bank statements or seeing the transfer from their account to yours or the closing agent’s. Acceptable proof includes a copy of the check they wrote and your deposit slip, evidence of an electronic transfer, or the closing agent’s statement showing they received the gift. If the gift is given directly to the closing agent at the time of purchase, it must be in the form of a check or electronic transfer. If you’re receiving a gift from someone you’ve lived with for the past year and you will both live in the new home, this gift can count as your own contribution towards the purchase.
References
For more details, visit Personal Gifts of the Fannie Mae Selling Guide.