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Saving up for the down payment can be a major obstacle people face when trying to buy a house. It's why so many people are never able to transition from renters into owners. Borrowers with high credit scores and low debt-to-income ratios might seem like ideal candidates for an FHA loan, but might still not have enough money saved to put down on a new home.
If you’re thinking of going this route, it might be a good idea to crunch the numbers first to find out how it may impact your tax liability when you file. The lender needs documentation of the deposit of sale proceeds. If money is seasoned, you may be able to avoid gift documentation. The more money you put down as part of your down payment, the stronger your loan-to-value ratio. Both the giver and the homebuyer must sign the letter, which doesn’t have to be notarized.
What is a Gift Letter for a Mortgage?
So long as the gift’s intentions and letter are honest, there are no real risks in signing a letter. The only time issues can manifest is when donors provide a loan disguised as a gift. Providing "gift" money that's actually expected to be repaid is a form of deception that can result in potential mortgage fraud on behalf of both parties involved.
Lenders will require the full amount of money as the required down payment, but friends, family, and employers can make a down payment gift to you that reduces your financial burden. That money is required to be verified by the lender as having come from an approved source. You may have the option to use cashed-in retirement funds but you are required to heed lender requirements AND the rules which govern the retirement account. The guidelines for sourcing down payments for FHA lenders are found in HUD 4000.1, the FHA Single Family Lender’s Handbook. The FHA loan rules are not the only ones that affect your down payment. The FHA and HUD published strict rules about down payments and require them from approved sources only.
FHA Down Payments for Homebuyers
With a 20% down payment ($60,000), you’d borrow $240,000, and your monthly payment would be $1,548. The following payment scenarios exclude additional fees and costs such as taxes and insurance. The more money you pay upfront, the less you have to borrow from the lender, and the lower your monthly payment will be. Create a free Bankrate account to get expert advice, personalized lending offers and other resources tailored to your unique financial goals.
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FHA Loan Rules for Down Payment Gift Funds
In some instances, though, your family may decide to gift you some money towards a down payment. This will work wonders over the life of your loan, as a larger down payment equals less money in interest. You may want to talk to a financial advisor about a down payment gift before you make on, though. First-time buyers want to know how much they're expected to save for their FHA loan down payments.
FHA loans and conventional loans are good options if you don’t meet eligibility requirements for VA or USDA. Give us a call to see if you’re eligible for a low-down payment loan. Among the most lenient types of loans for down payment gifts, USDA home loans and VA home loans have the least restrictions on who can provide mortgage gifts. Anyone you have a relationship with can provide a down payment gift, but the one caveat is that they can’t be an interested party.
Financial Planning Tips for New Home Buyers
Lenders want to protect themselves against default by making sure the gift money is what it appears to be (e.g. a gift, not a loan) and the borrower can afford the mortgage. If the borrower gets a down-payment loan from a co-worker and calls it a “gift,” their debt-to-income ratio rises, which can affect their ability to repay their mortgage. So, to protect themselves, the GSEs that back mortgages and United States Department of Housing and Urban Development have created rules for donor eligibility. The minimum down payment required for a conventional loan is 3%. But still, a 20% down payment is considered ideal when purchasing a home. Borrowers wishing to purchase a home with an FHA loan may need some help with the down payment.
Assistance with your down payment funds may be offered via a local program offering first-time homebuyer assistance with a down payment grant or other types of funds. Ask your lender if a specific program is acceptable to that financial institution--the FHA does NOT vet or approve these agencies. The lender will be required to obtain documentation showing the trade-in, the value of the property traded, etc.
When discussing the permitted sourcing of FHA home loan down payments or cash to close, many borrowers want to know if certain kinds of sources are acceptable to the lender. A down payment gift letter is intended to prove your relationship with the gift giver and that the funds are a gift and repayment isn’t expected. While many lenders will have gift letter templates available, the letter needs to come from the party that is giving you the funds.
If the buyer is planning to pay back the funds, that money was loaned not gifted, and then the lender is required to factor that into the debt-to-income ratio. This is to ensure that you can actually afford your mortgage payment. Withholding information about your down payment sources could put your loan qualification at risk, and even more importantly, it’s considered mortgage fraud, which is illegal. For conventional loans, so long as you’re investing a minimum of 20% or more as the down payment, all of the funds can come in the form of a gift. However, if your down payment is less than 20%, you’ll then be required to pay a portion of that money from your own pocket.
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