There are specific guidelines that need to be followed when receiving gift funds to purchase a home. If you do not know what they are or do not follow them, it may prevent you from purchasing a home or purchasing when you had planned. The guidelines are different for an FHA loan versus a conventional loan. These guidelines are for the purchase of a primary residence or second home. Below is an overview of the guidelines for each.
FHA loans can only be used to purchase a primary residence and allow for the full down payment to come in the form of a gift. That means the borrower does not have to have any of their own money to be able to purchase a new home. The gift donor cannot be a person or entity with an interest in the sale of the property. FHA requires the donor to be one of the following:
– Employer or Labor Union
– Close friend with a clearly defined and documented interest in the borrower
– Charitable organization
– Governmental agency
Conventional loans also allow for the full down payment to come in the form of a gift as long as the type of property being purchased is a one unit primary residence and the loan size is within the conforming loan limit, which is $417,000 or less. If the property is a 2- to 4-unit primary residence, second home or high balance loan size (not applicable in Illinois) where the loan-to-value is greater than 80% then the borrower must contribute 5% of their own funds. After this minimum contribution has been met, a gift of any amount can be used in the transaction. If the loan-to-value is 80% or less then all funds needed to complete the transaction can come as a gift. High balance loan sizes are excluded from this and only apply in counties deemed to be a high cost area. None of these counties are located within the State of Illinois. Conventional guidelines do not allow gift funds to be used when purchasing an investment property. Acceptable donors are:
– Relative who is related by blood, marriage, adoption or legal guardianship
– Fiance or domestic partner
– Donor may not be an interested party to the transaction.
Your donor should be prepared to sign a gift letter stating the dollar amount of the gift and the date the funds were transferred. The statement that no repayment is expected as well as the donor’s name, address, telephone number and relationship to the borrower must be included.
The lender will verify that sufficient funds to cover the gift are either in the donor’s account or have been transferred to the borrower’s account. A copy of the donor’s check or withdrawal slip and a copy of the borrower’s deposit slip or bank statement are examples of the documentation that will be required.
It is important to let the mortgage professional you are working with know right away if you are planning to receive gift funds when purchasing a home. If the guidelines are not followed properly, it could prevent you from purchasing the home or delay your closing. A qualified mortgage professional can help you avoid this from happening.
Please feel free to contact me at (312) 285-6644 with any questions you might have. And if you are a neighbor in Bowmanville, please say hello!
Heather McRae is a residential mortgage lender. She was first introduced to the real estate industry in 2001. Heather lends throughout the State of Illinois and specializes in condos within the City of Chicago. She is a proud resident of Lincoln Square’s Bowmanville neighborhood.