Gift guidelines are carefully regulated by lenders. A mortgage is a large commitment, and lenders need to ensure that borrowers can repay the loan, but also that they will repay the loan.A down payment represents “skin in the game” for the borrower, and removal of that initial buy-in makes the loan riskier. This is why lenders charge a monthly mortgage insurance fee for conforming loan down payments under 20%, and it is why they have strict “gift” guidelines for relatives. Lenders also want to make sure that the “gift” isn’t actually a “loan,” which can complicate the borrower’s ability to repay their mortgage.In this article, we will go through gift-giving guidelines for conventional, FHA, USDA, and VA financing, four of the most popular loan programs.Readers interested in giving or receiving a gift should also read this article by Dan Green of the Mortgage Reports to make sure that they are following the correct process with the correct records. Lenders will require very thorough documentation of every action and step involved.
The 30-year fixed and 15-year fixed are examples of popular conforming finance programs. “Conforming” or conventional finance refers to “industry standard” loans as laid out by federal mortgage insurers Freddie Mac and Fannie Mae.
Gift eligible: YES
1. Size restrictions: NO; borrowers no longer have a minimum contribution requirement for gift down payments.
(Note: down payments less than 20% are subject to mortgage insurance. See here for guidelines).
2. Family restrictions: YES; gift must come from a family members, as defined by blood or legality. Friends, fiancees, or parents of a fiancee are not applicable. Seller can contribute to closing costs and prepaid items.
With lenient down payment and qualification standards, the FHA loan program was created by the government to help more first time and middle income borrowers purchase a home.
Gift eligible: YES
1. Size restrictions: NO; borrowers can receive any amount of down payment as a gift (minimum down payment requirement is 3.5% of the sales price). Any gift amount can be applied towards down payment, closing costs, and prepaid items, and borrowers not required to invest any of own money.
Seller credits can be applied towards closing costs and prepaid items, but not towards minimum down payment.
2. Family Restrictions: YES; gift must come from a family members, as defined by blood or legality. Friends, fiancees, or parents of a fiancee are not applicable. Seller can contribute to closing costs and prepaid items.
The USDA loan is backed by the United States Department of Agriculture’s Rural Development Administration. Developed to improve the quality of life and economy in rural areas, the USDA loan is limited by both income (up 115% of median income in area) and town size (up to 25,000 at most, restrictions apply).
Gift eligible: YES
1. Size restrictions: NO; borrower can receive entire down payment as a gift. Note: USDA is 100% finance eligible, meaning no down payment is required.
Seller can contribute to closing costs and prepaid items.
2. Family Restrictions: YES; gift must come from a family members, as defined by blood or legality. Friends, fiancees, or parents of a fiancee are not applicable.
The VA loan is backed by the Veteran’s Administration. Designed to make housing affordable for military veterans and their families, the VA loan offers low mortgage rates, up to 100% financing, no mortgage insurance, and a 2.15% financing fee for loans up $417,000.
Gift eligible: YES
1. Size restrictions: NO; borrower can receive entire down payment as a gift. USDA is 100% finance eligible, meaning no down payment is required.
Seller can contribute to closing costs and prepaid items.
2. Family Restrictions: YES; gift must come from a family members, as defined by blood or legality. Friends, fiancees, or parents of a fiancee are not applicable.
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