by Jeff Ragan
Learn how to use a down payment gifts below...
Have you heard about using a gift to buy a house? It's not a story! You can really do this. Let me show you how.
This is possible with the use of a gift letter. This letter can be used as your down payment for your mortgage.
There are very few programs out there that will allow you to do this. The one I find that works the best is the FHA loan products.
You will need a loan officer who is familiar with these loan products if you want to use a down payment gift.
Having the option to use down payment gifts for your mortgage is the beauty of
the FHA products. It is like being handed a stack of hundred dollar bills. Feels pretty cool!
FHA requires a 3.5% minimum down payment. It is one of the best products for first time home buyers. One of the reasons it's so awesome is the use of an FHA gift letter.
These gift funds can come from a variety of sources. I would like to help you understand this so you can take advantage of it and qualify for that first home.
Now I am going to try and make this simple. First, what you need to know is, there is no FREE LUNCH in this world. Using gifts for the down payment to satisfy the FHA underwriter is just a fancy way to create the famous zero money down home loan.
In most cases you will be borrowing money for your down payment. Unless of course you are working with a loan officer that can help you get these funds from the seller.
It works out the same, but you can actually ask the seller of the house you are buying to give you these funds. Do not be surprised, this happens all the time! But you need a knowledgeable loan officer to help you do this. Find one that works well with the FHA mortgage loans.
Your down payment can be 100% down payment gifts for the your home loan. It can come from your relatives, a labor union or a charitable organization. The only restriction is if a relative is gifting you the funds, they have to be an immediate family member.
You will have to provide an FHA gift letter explaining the relationship of the one giving you the money and that you don't have to pay it back. Your loan officer will have access to such a form letter for you to fill out.
Many first time home buyers have a family member, usually a parent, that can or is willing to help them buy a house. Maybe they are tired of you living with them! (ha ha)
At any rate, it is normally not too hard to
come up with the down payment gifts to get your house bought. Since all you need is 3.5%, this is a small amount when compared to the
conforming loans that have much larger requirements. Thus it's not a huge some of money that needs to be gifted.
Although I have never seen this option used, I have heard of those who had the labor union of their company provide the gift. They may have a special fund that down payment gifts can come from.
If you're working for a company that has a huge labor union, you may want to investigate this possibility.
Most of these gift funds come from Charitable Organizations. The majority of transactions that I have seen have been done this way. It works much like a gift from a family member with the exception of one thing. Well, a few things really.
The charity makes a donation equal to your down payment requirement, but they want a charitable gift given back at the closing with a fee attached. Remember that I said there is no FREE LUNCH?
Don't let that discourage you. It is still an awesome arrangement that you may want to consider when you don't have the money saved yourself.
The Charitable Organization is not a party to this transaction. They are a third non-interested party. Their whole function as a non-profit organization is to help people become home owners. At face value this sounds good, you know, like free money. Nope!! Not at all.
You the buyer have to get a document signed by the seller that he will make a charitable contribution to this non-profit organization. The donation would be equal to your down payment gift plus a fee of around $300.
Here is what happens at the day of closing. The Charitable Organization wires the down payment money to the title company that handles your closing. Then, after you close, the title company wires the money back to them, with their fee, the same day.
FHA home loans allow this to happen because the Charitable Organization is one, non-profit, two, not a party interested in this transaction. You see, the seller and their real estate agent are too close to the deal, so they cannot make an outright use of these funds. It would look like they did it just to get the deal closed.
The same goes for you, the buyer, and your real estate agent. Perhaps now you can see why only a relative, labor union or Charitable Organization can offer these type of funds. None of them really have a vested interest in the transaction.
I call the use of Charitable Organizations funds for the down payment a legal way to launder money. It is allowed by FHA so there is nothing wrong with it.
One thing that I forgot to mention. The source of these funds must be proven. Some people try to get fancy on this and fool somebody. Do not bother, it will get discovered where the money came from.
If it is a family member, the funds have to be deposited into your account before closing. Also, to prove where the funds came from, the family member may have to offer a copy of their bank statement. This is to show they had the money to use for your down payment gift funds.
All the other sources are proven by documents from the organizations. These documents are provided by them and are quite simple to fill out such as an FHA gift letter.
Do not worry, sellers do not have a problem using these charitable organizations and making the required contribution. Keep in mind they want to sell a house. Chances are they are getting ready to buy another one and need the proceeds of the sale to buy it.
Now, as I mentioned above, if you are working with a loan officer worth his/her salt, they will be able to help you get all this done with the least out of pocket money to you.
This just scratches the surface of how these down payment gifts work. I am hopeful by now you can see that you can buy a house with the use of down payment gifts.
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