Gift Funds for Conventional Lending
Confusion is common when it comes to gift documentation requirements between conventional and government loan types. Below I’ve summarized donor, gift letter and documentation requirements for each conventional lending. Be sure, however, to check for lender overlays and additional restrictions and requirements as lenders may apply their own requirements and restrictions beyond those set forth by Fannie Mae and Freddie Mac.
Personal Gift Funds
A borrower of a mortgage loan secured by a principal residence or second home may use funds received as a personal gift from an acceptable donor. Gift funds may fund all or part of the down payment, closing costs, or financial reserves subject to the minimum borrower contribution requirements below. Gifts are not allowed on an investment property.
A gift can be provided by:
• a relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or
• A fiancé, fiancée, or domestic partner.
The donor may not be, or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction.
If the borrower receives a gift from a relative or domestic partner who has lived with the borrower for the last 12 months, or from a fiancé or fiancée, the gift is considered the borrower’s own funds and may be used to satisfy the minimum borrower contribution requirement as long as both individuals will use the home being purchased as their principal residence.
• When the LTV/CLTV/HLTV ratio is 80% or less and property type is a 1-4 unit primary residence or second home, a minimum borrower contribution from the borrower’s own funds is not required. All funds needed to complete the transaction can come from a gift.
• When the LTV/CLTV/HLTV ratio is greater than 80%, loan amount is non-high balance conforming and the property is a 1 unit primary residence, a minimum borrower contribution from the borrower’s own funds is not required. All funds needed to complete the transaction can come from a gift.
• When the LTV/CLTV/HLTV ratio is greater than 80%, property type is a 2-4 unit primary residence or second home, the borrower must make a 5% minimum borrower contribution (or 3% for MyCommunityMortgage) from his or her own funds. After the minimum borrower contribution has been met, gifts can be used to supplement the down payment, closing costs, and reserves.
• When the LTV/CLTV/HLTV ratio is greater than 80% and the loan amount is high balance, the borrower must make a 5% minimum borrower contribution (or 3% for MyCommunityMortgage) from his or her own funds. After the minimum borrower contribution has been met, gifts can be used to supplement the down payment, closing costs, and reserves.
Gifts must be evidenced by a letter signed by the donor, called a gift letter. The gift letter must:
• specify the dollar amount of the gift;
• specify the date the funds were transferred;
• include the donor’s statement that no repayment is expected; and
• Indicate the donor’s name, address, telephone number, and relationship to the borrower.
When a gift from a relative or domestic partner is being pooled with the borrower’s funds to make up the required minimum cash down payment, the following items must also be included:
• A certification from the donor stating that he or she has lived with the borrower for the past 12 months and will continue to do so in the new residence.
• Documents that demonstrate a history of borrower and donor shared residency. The donor’s address must be the same as the borrower’s address. Examples include but are not limited to a copy of a driver’s license, a bill, or a bank statement.
The lender must verify that sufficient funds to cover the gift are either in the donor’s account or have been transferred to the borrower’s account. Acceptable documentation includes the following:
• a copy of the donor’s check and the borrower’s deposit slip,
• a copy of the donor’s withdrawal slip and the borrower’s deposit slip,
• a copy of the donor’s check to the closing agent, or
• a settlement statement showing receipt of the donor’s check.
When the funds are not transferred prior to settlement, the lender must document that the donor gave the closing agent the gift funds in the form of a certified check, a cashier’s check, or other official check.
Gifts of Equity
A “gift of equity” refers to a gift provided by the seller of a property to the buyer. The gift represents a portion of the seller’s equity in the property, and is transferred to the buyer as a credit in the transaction. A gift of equity is permitted for principal residence and second home purchase transactions. The sales price for the property is at market rate. The acceptable donor and minimum borrower contribution requirements for gifts also applies to gifts of equity.
An executed gift letter meeting the requirements stated above is required in the loan file and the HUD-1 Settlement Statement must list the gift of equity as a credit from the seller to the purchaser of the property.
By Stacey Sprain