Are Cash Gifts Allowed to Use for the Purpose of Making a Down Payment?

Buying a new home can be a huge process, one that involves a lot of effort and a lot of different financial factors to fall into place. One of the biggest challenges for many is the need to come up with a down payment. Over the years we have found that not all lenders allow "gift money" to be used for down-payments when buying a house.

The down payment amount that is needed for a loan varies depending upon the actual type of loan and what it requires. For example, traditional loans often require 20% of the total purchase price of the home as a down payment. Other loans like the FHA mortgage can require much less, sometimes even as little as 3% down.

However, that 3% down is still a considerable amount to some people, and being able to come up with that money isn't always easy to do. Certain grant programs are out there that can help if you qualify, but another option is simply to use gift money to make a down payment. Gift money from friends and family is a valid way to go about coming up with a down payment, however it is important to understand a few things.

• The biggest issue is that underwriters will often need to ensure that the money in your account is yours � if they determine that it was gift money, it could mean that you're more of a risk to the lender than if it was your own funds. That means that they can determine you can't really afford the loan.
• Several loans exist that do allow you to use gift funds, and many will allow you to use gift funds for the entire down payment amount � like the previously mentioned FHA mortgage loan. Some may only require a portion of the down payment to be covered by a gift. IN generally, most traditional loans with a 20% down payment will also allow for all of the funds to come from gifts � smaller down payments may have different requirements. As such, your first step should be to look into which loans allow gift funds to cover the down payment and which ones don't.
• You'll have to provide some documentation about the gift, as well. A basic letter including the name of who gave you the gift, their relationship to you, the date you were given the gift, and a statement that says it was given with no expectation of ever having the money repaid are the primary things that need to be included in the letter.
• It's also important to understand that if the gift has been in your bank account for several months, additional red tape and paperwork may not even be required. Lenders usually go back about 3 months in your bank history to check for gifts. If you've had the gift for longer, keeping the documentation and letter on hand is still a good idea, but may not become a major issue.

If you're trying to purchase a home, being able to use gift funds to cover the down payment is something that is well worth understanding. The points above should help.

Understanding the Qualified Mortgage Rules with FHA

The FHA has long been an important resource to both first-time homebuyers and individuals with less than perfect credit who are interested in purchasing a home. Unfortunately, many of these individuals are now concerned that they may not qualify for loans with the FHA due to the new Qualified Mortgage Rules that are going to be put in place. In order to understand how these will affect borrowers, it is first important to understand exactly what Qualified Mortgage Rules are.

How will FHA mortgages be affected with the new laws and rules? Beginning this year, lenders will be required to prove that borrowers have the ability to pay back their loan. In most cases, this will result in lenders concentrating primarily on loans that have minimal risk and that are given to borrowers who have exceptional credit and very low debt to income ratios. In fact, federal guidelines require that banks declined loans to anyone with the debt to income ratio higher than 43%. While it is easy to understand why these regulations will be put into place in order to prevent defaults which could lead to a slower economic recovery or possibly even a recurrence of the financial meltdown that occurred nearly a decade ago when the housing market crashed, the unfortunate side effect is that many individuals will no longer qualify for a new home loan.

Fortunately, the Federal Housing Administration, which has always been a valuable asset to individuals who are unable to qualify for traditional loans from banks and other lenders, may still be able to offer interesting options to these individuals. HUD spokesman Brian Sullivan has stated that the FHA has the authority, granted to it by the Dodd-Frank Act, to issue its own ability to pay rules for the FHA mortgages that it guarantees.

The FHA, generally, is able to offer loans to individuals who have a dead income ratio as high as 55% and offers the same rates for all the products that it has available. Additionally, it provides individuals with the ability to make a down payment as low as 3.5% and even those people with a credit score as low as 500 are able to qualify for a loan through the agency. By giving the FHA the ability and autonomy to set its own ability to pay rules, there are still a number of options available to individuals who have limited credit histories, low credit scores, or who have a debt to income ratio that would be too high for traditional banks to provide them with FHA mortgage loans.