The majority of home purchase loans are going to require a downpayment. It is important to understand what a mortgage underwriter is and is NOT going to allow as an acceptable down payment source.
Acceptable Downpayment Sources:
- Own Funds – Checking or Savings
- Your Own 401k/IRA/Stocks/Bonds
- Net sales proceeds from sale of real property
- Sale of personal property
- Gifts From Family Members (depending on the loan program)
- Employer Assistance Programs
- Some grant programs
Unacceptable Downpayment Sources:
- cash advances on credit cards
- borrowing against household goods and furniture
- other similar unsecured financing
- anything money which there is no “paper trail”
Mass. Mortgage Buddy Tip: CASH IS NOT AN ACCEPTABLE DOWNPAYMENT SOURCE! The mortgage underwriter will examine each and every deposit on the bank statements you provide. Any cash deposits will be deducted from the balance in your account, and will not be allowed to count toward your downpayment or be used in any way in the mortgage transaction.
Mass. Mortgage Buddy Tip: Downpayment options for your home purchase are loan program specific. PLEASE discuss the down payment options with The Mortgage Buddy BEFORE you make an offer on a home, accept gift funds, sell any assets, or move any money between accounts.
Use of Gift Funds as a Downpayment:
Gift Funds Definition
If you’re getting a gift of downpayment for your home purchase, you’ll want to make sure you do it properly. Do it wrong and the mortgage lender may deny your mortgage loan application. In order for funds to be considered a gift, there must be no expected or implied repayment of the funds to the donor by the borrower – i.e. you do not have to pay the money back.
Who May Provide a Gift
An outright gift of the downpayment is acceptable if the donor is
- the borrower’s relative
- the borrower’s employer or labor union
- a close friend with a clearly defined and documented interest in the borrower
- a charitable organization
- a governmental agency or public entity that has a program providing home ownership assistance to low- and moderate-income families, or first-time home buyers.
Who May NOT Provide a Gift
An outright gift of the downpayment is NOT acceptable if the donor is
- the Seller
- the real estate agents
- the builder
- a related entity of any of the above
Gifts from these sources are considered inducements to purchase, will be disallowed, and must be subtracted from the sales price.
Note: This also applies to properties where the seller is a government agency selling foreclosed properties, such as HUD, the U.S. Department of Veterans Affairs (VA) or Rural Housing Services.
Lender Must Verify The Source of the Gift Are Donor’s Own Funds
Regardless of when gift funds are received by the borrower, your mortgage lender must verify that the gift funds were provided by an acceptable source, and were the donor’s own funds. Generally, FHA is not concerned with how a donor obtains the funds they are gifting, so long as the funds are not derived from a party to the sales transaction. Donors may borrow gift funds, provided the mortgage borrowers are not obligated to repay the loan.
Gifts of Equity In A Family Owned Home Are Allowed
Family members may provide part of the equity in their home as a gift when property is being sold to another family member. This is a very common scenario and easiest to explain with an example. Parents want to sell their home in Mass. to daughter and retire to Florida. The fair market value of the house is $200,000 but they want to sell it to their daughter for $150,000. This is perfectly acceptable provided: (1) the home appraise at $200,000; (2) the parents sign a gift letter certifying the $50,000 of equity does not need to be repaid; (3) the daughter is in all other aspects qualified to buy the home.
Please note, there may be gift tax implications with this scenario, so consult your CPA to fully understand the tax issues.
Paying Off Borrower’s Consumer Debt
FHA regards the payment of consumer debt by third parties as an inducement to purchase. When someone other than a family member has paid off debts or other expenses on behalf of the borrower
- the funds must be treated as an inducement to purchase
- there must be a dollar for dollar reduction to the sales price when calculating the maximum insurable mortgage
- Note: The dollar for dollar reduction to the sales price also applies to gift funds not meeting the requirement that the gift be for down payment assistance, and provided by an acceptable source.
Downpayment Assistance Programs and Grants
At one time, seller assisted downpayment grants were very popular through programs such as American Dream and Nehemiah. In 2008, HUD disallowed all Seller assisted downpayment assistance of any type due to the higher default rates associated with these programs.
Downpayment assistance grants can still be utilized if the entity is considered a charitable organization AND the funds do not either directly or indirectly come from the Seller. FHA does not “approve” or “endorse” downpayment assistance programs administered by charitable organizations, such as nonprofits, but will allow these monies to be construed as gift funds in meeting the 3.50% downpayment requirement or to be used for closing costs. Lenders are responsible for ensuring that a gift provided by a charitable organization meets the appropriate FHA requirements, and that the transfer of funds is properly documented.
Cities and towns and non-profit housing agencies throughout Massachusetts provide down payment and closing cost assistance to first-time homebuyers in their regions. This assistance covers some of the costs that homebuyers must pay at the time they buy their home.
Down payment and closing costs assistance is generally for lower to moderate income homebuyers who can afford monthly mortgage payments but cannot save enough to pay the initial home purchase costs. The goal of the program is to increase homeownership among lower income households.
Mass Mortgage Buddy Tip. Please contact me directly for information on what organizations are providing downpayment assistance and grants throughout Massachusetts for which you may be eligible.