In today’s real estate market, lenders are requiring higher down payments than before the bubble burst in 2006. To meet this requirement, potential homebuyers are asking relatives to help fund their down payments and/or closing costs. However, there are rules that apply when using gifts for these purposes.
Gifts can only be used as a down payment or for closing costs for primary residences or second homes. This excludes rental and other investment properties or commercial buildings.
The borrower must provide at least five percent of their own funds towards the down payment, unless eligible assets include gift funds and the loan-to-value (LTV) or combined loan-to-value (CLTV) amount is less than or equal to 80 percent.
Plus, the money must be provided by a relative, legally-recognized domestic partner or fiancé. A relative is considered any person related by blood or legal proceedings, such as marriage and adoption. Parties that have a vested interest in the transaction, such as builders, sellers, realtors or sales associates, are prohibited from contributing.
Documentation needs to be submitted to verify the transaction is valid and complete. This includes a letter from the donor stating their relationship to the borrower, the address of the property to be purchased, full donor contact information and a statement that the gift does not need to be repaid. The gift recipient also needs to provide proof that the funds have been transferred, such as a cancelled check, borrower’s deposit slip and bank statement showing the deposit, proof that the funds came out of the donor’s account, copy of the donor’s check at closing or the settlement statement showing receipt of donor’s check.
These are the general guidelines that are valid today; however, these change frequently so it is best to contact a mortgage industry professional when you are preparing to buy. With that said, gifts are a great way for potential buyers, especially for first-time purchasers, to more quickly realize their dream of owning a new Chicago home.