A HELPING HAND

Down Payment Gifts Are a Great Way to
Improve Your Mortgage Borrowing Power.

There’s certainly no shame in getting help from a family member — or anybody else in a position to offer assistance — when you’re gathering money for the down payment on a home.

The tight U.S. economy, plus a proliferation of first-time buyers, has increased the number of mortgage applicants using cash gifts from family and friends. It’s not at all uncommon.

Plus, there are many good reasons to make a healthy down payment. If you put as much as 20 percent down, you’ll be more likely to get the most favorable interest rate available and there’ll be no private mortgage insurance (PMI) charge.

That all adds up to significant savings over time. So, if you have someone who’s willing to help, then by all means take the money.

It’s important, however, that you “accept your gift” properly. Do it improperly and your lender is likely to reject your loan in underwriting.

If you don’t want to make a 20 percent down payment, that’s fine. You can still use gift money for certain low down payment mortgages including the FHA purchase mortgage, which requires a 3.5 percent down payment, and the Fannie Mae Conventional 97 program, which requires just 3 percent down.

In any case, there’s a process when accepting a cash down payment gift, and no matter what your loan type the process is the same. Follow the rules to the letter.

First, the gifter should write a gift letter that includes the following information:
• The amount of the gift;
• The subject property address;
• The relationship of the gifter to the giftee;
• A note that the gift is actually a gift and not a loan.

If you’re the gifter, and you’ve sold stock to raise the cash, make sure that you document the sale as well as the transfer of funds from your brokerage account into the account from which you’re making the gift.

Next, write a check to the homebuyer for the exact dollar amount specified in the gift letter. Photocopy the check and keep one copy for your records and give one copy to the buyer.

Yes, writing a check seems a bit old-school when you could simply wire the funds. But by creating a paper trail, you’ve made it easier for the lender to document the transaction.

After receiving the check, the giftee should deposit it in person. Again, entering a bank and speaking to a teller seems quaint these days, when so much banking is done online. But this is one transaction you’ll really want to handle yourself.

Remember: Don’t co-mingle the gift deposit with other funds. The amount specified on your receipt should match exactly the dollar amount on the down payment gift letter. If it’s off by even a penny, the lender may reject your letter and the funds that came with it.

If you’re receiving multiple gifts — we should all be so lucky — then follow this same process for each one independently. Separate deposits, matching receipts. You know the drill by now.

Oh, and speaking of letters, an old-school “thank-you” letter to whoever ponied up isn’t a bad idea, either.