Posted February 4, 2014Tweet
Receiving a cash downpayment gift for the purchase of your next home? You're not alone. Many U.S. home buyers do it.
However, if you're getting a cash gift for downpayment, you'll want to make sure that you "receive" your cash gift properly. There's a specific way to do it. Receive your gift improperly and your lender will likely reject your home loan application.
Follow the rules of cash-gifting to get your loan approved.
It's common for today's U.S. buyers to receive cash downpayment gifts. First-time home buyers are most likely to receive a cash gift among all buyer types, but repeat- and move-up buyers receive them, too.
The largest driver for today's gifts of equity is the want of U.S. buyers to make a 20% downpayment.
With a 20% downpayment, home buyers can often qualify for the lowest mortgage rates offered by their bank; and with 20% down, there is no accompanying private mortgage insurance (PMI) to pay.
Furthermore, with 20% down, buyers can seek loans backed by Fannie Mae and Freddie Mac which, over thirty years, may offer lower costs than a comparable FHA-backed mortgage.
2014 conforming loan limits cap at $417,000 nationwide except within designated "high-cost areas" where home prices exceed the national average by some multiple.
High-cost areas are determined by the government and include such cities as San Francisco and Los Angeles, California; Washington, D.C. and its surrounding counties (Montgomery, Fairfax and Loudoun); as well as New York City and San Diego.
In high-cost areas, conventional loans are capped at $625,500 for single-family homes, and multi-unit homes (i.e. 2-unit, 3-unit, 4-unit) can range to $1,202,925.
Not everyone receiving a cash gifts want to make a 20% downpayment, though. Cash gifts are also allowed for low-downpayment mortgages including the FHA purchase mortgage, which requires a 3.5% downpayment; and the Fannie Mae 95 program which requires just 5% down.
Excess gift monies can be used for furnishing a home; making repairs; or the establishment of an emergency fund.
When you accept a downpayment gift, remember that there's a right way and a wrong way to do it. For example, you cannot randomly deposit your cash gift into a bank account. That will get your loan denied.
There's a 3-step process when accepting a cash downpayment gift and no matter what your loan type -- Conventional, FHA, VA, or other -- the 3-step process is the same. Follow the rules to the letter.
First, write a gift letter that follows the includes the following information :
The gift letter should be only as long as needed and should not contain "extra" information. Have all parties sign and date the letter. Set the letter aside -- you'll come back to it in the section below.
With your mortgage downpayment gift letter written, you'll want to make sure you don't violate the rules of "taking a gift". In order to do that, make sure to keep an extra-strong paper trail for the money being gifted.
If you are the person who is gifting funds to the buyer, for example, and you sell your personal stock holding as part of the downpayment gift process, you will want to make sure that you document the sale of your stock as well as the transfer of funds from your brokerage account into the account from which you're making the gift.
Do not make the transfer without a proper paper trail.
Next, you'll want to write a check to the home buyer for the exact dollar amount specified in the gift letter you've written. Photocopy the check. Keep one copy for your records and give one copy to the buyer -- the lender will want to see it as part of the process.
Note that writing a check is will require more steps and will require more effort than simply wiring funds to the buyer. Be okay with these extra steps. It's simpler for a lender to document and track a personal check than it is to track a wire; and it's good to make things simple for the bank.
Now that the gifter has handed, in the form of a check, a downpayment gift to the buyer, the following steps are required.
First, with the gift check in hand, the buyer should physically walk into a preferred depository bank (e.g.; Wells Fargo, Bank of America, Chase, Huntington) to make the deposit in-person. Do not deposit the check online using an iPhone or Android app; or at an ATM machine.
In addition, into whichever bank account you deposit your gift money, make sure it's the same bank account from which all of your money at closing will be drawn. You do not want to bring money to closing from multiple savings accounts. This, too, can make things difficult on a bank and the goal is to keep things simple.
When you get to your branch, do the following :
Under no circumstances whatsoever should you "co-mingle" your gift deposit with other monies, nor with other gifts. The amount specified on your teller receipt should match exactly the dollar amount on the certified downpayment gift letter.
If the amount is off by even a penny, the lender will likely reject your letter and the funds that came with it.
Note that if you are receiving multiple cash gifts for downpayment, you should follow this process for each gift independently. Again, do not co-mingle your gifts. Be guided by your gift letter.
It should be noted that there may be tax implications for givers of a cash gifts for downpayment, and receivers of them. These are discussion points with your accountant.
And, remember that your lender will not report cash gifts to the IRS; it's not the lenders responsibility to report such things. Your lender will use your gift letter(s) for underwriting only, in an attempt to approve your loan.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2014 Conforming & FHA Loan Limits
Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.