Using gift money to buy a home
While it’s generally known that home buyers may use “gift funds” toward the purchase of their home, there is also a great deal of confusing information out there that can start your head spinning when you try to figure out what is or isn’t allowed and what documentation will be needed so the gift may be used in the transaction.
The Big Question: Why is gift money a big deal?
Yes, let’s talk about why gift money is such a big deal. It actually goes back to our government’s efforts to prevent money laundering through real estate transactions. This is part of our country’s fight against illegal drugs, weapons and even terrorism. Mortgage companies are required to document the source of all money going into a real estate transaction, and that especially includes money coming from someone other than their borrower(s). There is a wealth of great information on the efforts being made here: https://www.fincen.gov/history-anti-money-laundering-laws
“How much of the money I put toward my home purchase can be gift money?“
It depends on the mortgage program you’re going to use. Some programs allow for the entire down payment to be in the form of a gift. Others may require at least 5 percent of the purchase price from your own funds unless the total down payment is 20 percent or more. This is a question to discuss with your loan officer. They’re going to be familiar with the requirements of each mortgage program and will be able to show you your options.
“My parents are willing to give me twenty thousand dollars to help me buy a house. Is that okay? What do we need to do?”
Shouldn’t be a problem if everything is above board and documented well. First, write your parents a big, heart-felt Thank You card. Next, educate yourself on what to expect.
In most situations, the gift donor or provider must be a family member, fiancé or domestic partner. Additionally, they must be able to supply evidence that they can give you the gift. What does that mean, “supply evidence?” This can be a copy of their bank statement, a cancelled gift check or a signed letter from their bank attesting to the availability of funds in their account. Sometimes more than one of these items may be required. It’s important that you understand this and communicate it with your gift donor when arranging the gift, because they will be expected to supply documentation in order for the gift to be used.
The Gift Letter
Your mortgage originator will usually have a form that the gift donor can complete and sign, or a simple letter from your gift donor may be requested. Whether it is a form or a letter, these items usually need to be included:
- The donor’s name(s), address and relationship to you
- The donor’s account information (the account(s) where the gift money is being held)
- The property being purchased
- The dollar amount of the gift
- The date or approximate date of the transfer with a statement that the funds are a gift with no expectation of repayment
Properly documenting the transfer of gift funds is vital. Your mortgage loan team will give you the guidance you need to handle the transaction properly. When they do, try to follow their instructions to the letter. It may seem like a lot of silly details but see each one through. There’s no replacement for getting it right the first time.
Here is a typical example of what that guidance may look like:
- The donor should give the gift in the form of a check or wire
- If by check, make a copy of the check before depositing it into the account that will be used for verification of funds to close
- Keep the transaction simple - DO NOT combine this deposit with any other incidental deposits
- Provide a copy of the deposit slip or confirmation and either an online update or the next account statement as evidence that the deposit “cleared” (meaning the funds are fully available in the account now)
Handled correctly, gift funds can be a big help toward achieving homeownership. Handled incorrectly, there is the potential for gift funds to be ineligible, and you’re now researching other ways to afford the home you want to buy.
If you’re thinking of using gift funds to help buy your home, follow the guidance above. Talk with your gift donor about the documentation that may be needed from them so they aren’t uncomfortable or cause delays when it’s requested. Make sure the gift letter includes all the information needed by your mortgage company. Manage the transfer of the gift money exactly as instructed and provide documentation promptly. If any further documentation is required get it quickly. And ask your mortgage loan team any questions that come up! They’re going to want to help get this right so you can walk away from settlement with keys in your hand saying:
“that was a lot easier than I expected it would be!”
The cost of living has turned the typical family household construct on its head.
According to a recent survey from the Pew Research Center, approximately 15 percent of millennials age 25 and 35 years still live with their parents. Compare that to the 10 percent of 25- to 35-year-old Generation Xers who were living with their parents in 2000 or the 8 percent of 25- to 35-year-old baby boomers who did the same in 1981.
So it may come as a bit of a surprise that, contrary to what the polls suggest, millennials represent the largest group of individuals who are in the market to buy a house.
Millennials run the real estate market
That's according to a recent survey from the National Association of Realtors. In its Home Buyer and Seller Generational Trends study, the NAR found that 36 percent of residential real estate transactions during the past year involved 18- to 35-year-old men and women. This includes all housing types - townhouses, co-ops and condominiums - and not just single-family residences. That's up from 34 percent over the corresponding period in 2017. These figures are well ahead of Generation X buyers, who made up 26 percent of all home purchases in the past year.
What drives millennial homebuying?
Why are millennials accounting for a larger slice of the homebuyer pie? It's partly due to their spending capabilities. The typical millennial household makes around $88,200 per year, up from $82,000 in the 2017 version of the NAR's Generational Trends analysis.
For about 1 millennial homebuyer in 5, these purchases represent their introduction to homeownership. In other words, buying a home means leaving the nest for the first time.
Millennials are loath to move as a rule, but are also living with their folks for longer periods than their older contemporaries. In fact, 91 percent of the 25- to 35-year-old respondents in the aforementioned Pew Research poll who are currently living with their parents had lived at home for at least 12 months. The same was true for 86 percent of the same demographic of Generation Xers in the 2000s.
Everyone's situation is different, but if nothing else, the numbers suggest more millennials are proving their fiscal mettle and learning that the American dream is still alive.
What is a mortgage LE?
For most Americans, the third of October in 2015 was just another ordinary day, no different than any other. But for lenders, as well as people applying for a mortgage loan, that October day fundamentally changed the way mortgage requests are handled to increase transparency.
As you may know, lawmakers passed a number of regulatory measures to reduce the likelihood of another Great Recession. One of them was what is formally known as a Loan Estimate (LE). So what exactly is a mortgage LE, and why are they so important to the borrowers and lenders alike?
LEs come in threes
According to the Consumer Financial Protection Bureau, a mortgage LE is a document that's usually about three pages in length. Roughly 72 hours after a lender receives a prospective buyer's application to take out a mortgage, that borrower is given an LE, which includes all the essential elements that are important for them to know about their loan.
Most notably, an LE provides details on the estimated cost borrowers can expect to pay should they decide to move forward with the loan application. This includes the loan amount, the interest rate, closing costs and a ballpark figure of their monthly mortgage payment. An LE also has other specifics that you'd expect to find on this type of document, such as the borrower's name, address, Social Security number and their annual salary. In addition, an LE frequently contains particulars on certain fees or penalties incurred if borrowers miss their payments or pay off their loans in a timeline contrary to what was originally agreed upon. For example, some lenders issue a prepayment penalty, which triggers if the loan is paid off before what was determined at the closing table. Prepayment penalties, however, are not customary.
In short, LEs contain both necessary information as well as other details that the lender deems noteworthy to mention.
How does it differ from a GFE?
For those who've been through the mortgage process before, an LE may sound awfully similar to a Good Faith Estimate. As part of the Know Before You Owe mortgage disclosure rule, the LE replaced the GFE. Industry experts acknowledge LEs are better than GFEs because they're easier to comprehend. LEs aren't usually full of financial jargon, and they encourage borrowers to weigh all their options and compare loan costs and fees against those offered by other banks or mortgage entities.
No one likes to be surprised by hidden expenses, especially when it comes to mortgage payments. LEs aim to prevent this from happening. Loan origination expert Jonathan Dyer told MagnifyMoney that, under the changes implemented by Know Before You Owe, whatever fees loan originators originally discuss with borrowers often remain as they are, something that wasn't necessarily true under the GFE system.
"Regulatory agencies have now prohibited any increase of disclosed fees without a significant change in the loan purpose or loan amount," Dyer said.
An LE is not a mortgage approval
It's important to understand, however, that an LE is not a formal indication that a loan has been approved, according to the CFPB. Rather, an LE is a complimentary service that lenders are required to provide, giving applicants an idea of what they can expect if everything checks out.
Applying for a mortgage can seem like quite the ordeal. If you're someone who is new to homebuying, the paperwork alone can feel like an insurmountable challenge. An LE is designed to simplify the process, not to mention provide and protect borrowers seeking financial support at a sensitive time in their lives.