Tuesday, July 22, 2008

Need Cash for a Home Closing? Consider a Gift

Coming up with a down payment or money for closing costs for a home loan can be a challenge these days. What extra money you were setting aside may all of sudden be going toward your gas tank or your grocery bill. To obtain your dream of homeownership, it may be time to accept that gift from Mom and Dad………

I saw a cartoon the other day that was pretty funny, but also pretty sad when you think about it. It showed a couple sitting across from a mortgage lender, and the caption read, “We’re here to apply for a tank of gas.” With increases in prices for just about everything, it gets more and more difficult to stash away a nest egg for a down payment. And pretty much every loan requires some part of down payment, even if you get a 100% financing loan. After all, you still are generally going to be required to put down some earnest money on your contract and in most cases, pay for an appraisal up front. You may have been trying to save it up on your own, but it may be time to accept some help from your family.

Most loan programs, be it Conventional, FHA, VA or Rural Housing, require the borrower to pay for something. In particular, FHA and Conventional home purchases want a minimum of 3% to come out of the borrower’s pocket. If you are doing a Conventional loan, you still can’t receive a gift for your 3% down payment, but you can use a gift to help with closing costs. However, FHA will allow your source of down payment to be a gift. So, if you find yourself a bit short on cash, you may need to ask someone to gift you the down payment or closing costs (or if your really lucky, and it’s allowed – both!).

All lenders are particular about just who can give you a gift for your down payment or closing costs. Pretty much across the board, the gift must be from a blood relative. You may have to prove that the gifter is a relative thru birth certificates, christening records, etc. Strange but true. Conventional loans will also allow an employer to give you a gift. But in any case, the most important factor is that whoever is giving the gift does not expect to be paid back. A certification to that effect will be required to be signed by the donor. Otherwise, it’s really a loan, now isn’t it? And as a responsible lender, we’re going to include that payment in your debt to income ratio, and we’ll probably want a bunch of documentation to prove the terms, etc. So, make sure it truly is a gift.

As of the date I’m writing this article, FHA will allow for down payment assistance programs, such as Nehemiah or Ameridream. Lenders view these products as “gifts” in a sense. They are basically seller concessions funneled through the down payment assistance channels. However, by the time this article is published, they may be null and void. It’s currently being reviewed and could go away. Or it may still be there, but just know it’s under review.

Lenders are very particular about how the gift funds reach the closing table. If you deposit the gift before closing, you have to show it coming out of the donor’s account and depositing into your account. It’s a lot of paper to collect. The easiest method is for Grandpa or your Great Aunt to just send a cashier’s check payable to you and your title company to the closing table. Smoother, quicker, simpler.

Gifts are a wonderful thing, and a gift of a down payment is a useful gift. After all, I think it’s safe to say that homeownership is one gift that keeps on giving, wouldn’t you?

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