Financial Facts: Things to know when receiving down payment help from family
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Having a substantial down payment, especially for first-time homebuyers, is not often seen here in the High Country. Many first-time buyers are using the low down payment programs available and are getting into homes with little out of pocket expense. Then there are the buyers whose families have the assets to give them cash for the purchase. These buyers should stop what they are doing and read this article.
First, when a buyer signs a contract to purchase a home, the contract shows what type of mortgage the buyer plans to obtain and how much of a down payment will be made. For those who plan to make a down payment, the contract does not show where those funds are coming from. And, during the many years that I have been in the mortgage business, I have never seen a seller even care where the buyer’s funds originate. But my mortgage investors do want to know where those funds are and have been.
If you as a buyer plan to use gifted funds from family or friends, you need to know that there are rules that must be followed. The first rule is that the gifted funds must be disclosed to the mortgage investor. The mortgage investor wants to see that the funds are indeed a gift and not a loan. They also want to see a history of where the funds came from. They want to see copies of checks, or wire transfers of the funds. They want a letter from the grantor stating that the funds are a gift and will not be a lien on the new home. And they want to see that the funds are in the buyer’s personal bank accounts.
These requirements can be avoided if you, as a potential borrower, do a few things a few months in advance. If mom, dad, aunt, uncle or grandparent offers to gift you funds, accept it and get it now. Place the funds in your bank account now and in three months those funds are yours, at least according to most all mortgage programs. No gift letter is needed, no copies of checks either. Once your bank account shows three months of the cash being in the account it is considered yours. So plan ahead and get the cash today.
Another way to show you have the cash is to have your name added onto the bank account where the funds sit today. As an example, my name is on my mothers bank accounts. I have no idea where she banks but if I needed to show that I have access to the cash all I would need to do is ask my mother to send me the last three bank statements. This would document that the funds are hers and mine, and can now be used to qualify for the mortgage.
Another way to cover some, if not all, of your closing costs and in some cases your down payment is for the seller to gift you the funds. This has to be detailed in the purchase contract and there are limits as to how much can be allowed. Obtaining funds from the seller can be difficult to get approved by the mortgage investor and does take a lot of coordination between the buyer, seller, all the real-estate agents and the real-estate appraiser. I strongly suggest that if this idea is used you work with the mortgage professional to be sure the funds will be approved by the mortgage investor.
The bottom line is there are ways to use gifted funds, but gifted funds must be used in specific ways and must be documented. Do not put off meeting with your mortgage professional to be sure the funds can and will be acceptable to the mortgage investor.
Bob Kieber can be reached at
(970) 262-1199 or at firstname.lastname@example.org. He is a local mortgage lender and
principal of Resort Lending.
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