Down Payment Gift Rules from a Friend or Relative
For a lot of home buyers in California, there are two major challenges to purchasing a home, especially in coastal areas. Those are the down payment and closing costs.
In Orange County, California, a designated high-cost area, conforming loan limits are capped at $679,650 for single-family homes, and 2-unit, 3-unit, 4-unit homes can be as much as $1,307,175.
Not everyone can come up with a 20% down payment $135,000 or sometimes even 10% down payment. Some prefer to make smaller down payments of 10% as an alternative. Fortunately, there’s a solution to lower these upfront costs.
Closing cost assistance is allowed from family members or other approved sources for California home buyers.
It’s widely accepted for home buyers to get cash gift down payments. Out of all borrowers, the most likely to receive a cash down payment gift are first-time home buyers.
Guidelines of Gift Money from Family Members
These days, most mortgage programs allow borrowers to use gift money from an approved source. These funds can be applied to the home buyer’s down payment as well as the closing costs, in some cases.
Based on the kind of loan, a family member, a close friend, an employer, or an approved housing agency may gift the money to the borrower. One of the most common sources for gift funds are family members.
Overview of Fannie Mae Gift Guidelines.
Along with Freddie Mac, Fannie Mae is one of the two government-sponsored enterprises that buy loans from lenders. These two corporations have specific guidelines and requirements for the kinds of mortgage loans they can purchase. And these requirements also apply to California home buyers and those refinancing.
Fannie Mae details regarding borrowers receiving help with closing costs:
An acceptable donor may provide personal gift funds to a borrower of a mortgage loan secured by a principal residence or second home. Gift funds can be all or part of the down payment, closing costs, or financial reserves subject to the minimum borrower contribution requirements below.
Using gift money from an approved source is one method California home buyers can decrease or even get rid of those upfront costs, making it possible to purchase a home earlier and with less out-of-pocket money.
Then again the money can’t originate from anyone or any business organization. Rules stipulate who can provide closing cost assistance for California home buyers.
- In most cases, gift money for down payment or closing costs may be provided by the borrower’s relative. Fannie Mae defines a relative as “the borrower’s spouse, child, dependent, or by any person related to the borrower by blood, marriage, adoption, or legal guardianship.” It also includes a fiancé / fiancée, or a domestic partner.
- The hard line rule is the person giving the down payment or closing cost gift is prohibited to be an “interested party” in the transaction. This means that people normally involved in the transaction such as a real estate agent, home builder, developer, or lender cannot gift money.
Summary: Relatives are acceptable. Interested Parties are not acceptable.
The Federal Housing Administration also permits third-party contributions for people who buy a house in California using an FHA loan. These funds may be applied to down payments or closing costs. Similar to Fannie Mae, FHA has strict guidelines for who can and cannot provide gift money to the borrower.
FHA does allow gifts from approved charitable organizations, government agency, public entity, and close friends who have a “clearly defined and documented interest in the borrower”.
The borrower isn’t required to put any of his or her own funds when receiving a gift that takes care of the full down payment and closing costs, unless the final loan amount is over $453,100 or $679,650 in high-cost areas.
Gift Money Documentation
No matter if you’re applying for a conventional or FHA loan, any gift money applied to the down payment or closing costs in California is required to be documented. The person (or approved charitable organization) providing the funds needs to write a letter that states their relationship to the home buyer.
The “gift letter” must also make clear that the person donating the funds for the down payment or closing costs does not expect any kind of repayment. In other words, the funds need to be an actual gift — not a loan to be repaid.
The takeaway is that there are alternatives for California home buyers who are unable to afford their closing costs and/or down payments. A knowledgeable loan officer can help you when it comes to available loans based on your qualification and potential gift money. You may not have to rent that long in California.
