“You’re welcome, son. Just make sure to pay us back despite what we had to sign for you.”

Buyers often forget that a gift can be a quick fix when there are insufficient funds for the down payment and closing costs. Gifts can also be used to boost the down payment to 20% – the minimum amount required to avoid having to pay monthly private mortgage insurance for conventional loans. Be careful, though, because there are lots of conforming loan rules (aka “lender overlays”) that could derail the gift idea.

Oh, by the way ...

A borrower’s gift must come from someone related by blood, marriage, adoption or legal guardianship (including a fiancé/fiancée or a domestic partner). But keep in mind:

1. For FHA financing, the gift can also come from a close friend who has a “clearly defined and documented interest in the borrower” (at the discretion of the underwriter) [Note: Remember that FHA financing requires a monthly mortgage insurance premium payment for the life of the loan, regardless of the amount of down payment].
2. Gifts cannot be used to satisfy reserves that may be required from the borrower.
3. The donor and donee are required to acknowledge in writing that the gift cannot be repaid (and the donor needs to provide a bank statement evidencing the existence and withdrawal of such funds).
4. There can also be gifts of equity (i.e., a parent selling a home to a child at a below market-price and/or gifting some of the net proceeds to the child).

Here’s the Point:  A gift from a relative can be a great way to help a borrower get a mortgage, but it is important to know the rules before thinking it’s a “done deal”.

Mike Kanuka, Founder & President