In life, there are essential things that we aspire for and often, these find us wanting because we can’t afford them. Close relations often come to the rescue and offer gifts that can benefit the cause such as a gift letter template. In receiving a gift letter for mortgage, there are some requirements to consider.
In the first place, why is it necessary to know who the gift letter template comes from, especially if the giver is a member of the family? When it comes to down payment gift letter, you should never think of it as a loan.
Also, the party who gives the gift shouldn’t be one selling the property and the person doesn’t need to be a member of your family either. However, there is one exception to this rule concerning the seller. This would be when the mortgage gift letter template comes from the seller who is a member of the family.
Depending on who would give the gift, each type varies slightly. Listed below are the allowed givers for Federal Housing Administration or FHA gift letter and Fannie Mae letters:
There is a requirement of a specific language to use in a gift letter sample. This is why it’s recommended to utilize a gift letter template instead of freely writing one. In the gift letter, you must state the name of the giver, the address, contact details, the giver’s relationship with you, the amount, and the source.
The gift letter for mortgage must also specifically emphasize that the amount given isn’t considered a loan.
When you go through a process of mortgage underwriting, they may scrutinize all of your large accounts, even those large checks issued by parents or by other members of the family. The bank usually asks for a gift letter sample from the one who provided the money as a requisite before they can approve a loan.
Most prospective homebuyers generally don’t have the required amount of money to pay for the whole down payment when purchasing a home and for this, they may choose to seek the assistance of family members to complete the required amount.
Lending institutions also want to protect themselves by ensuring that the funds you expect won’t just add up to your financial obligations. Should the money come from a loan, this might affect the ability of the borrower to pay back the lender and the banks won’t like that.
This is where a down payment gift letter becomes very important as it informs the bank that the borrower received a gift from them, not a loan. This is an assurance to the bank that the borrower isn’t taking on any additional debts that might have an effect on their investment.
Here are the most important elements to include in the mortgage gift letter template:
Families who plan to buy a new house always gloss over real estate listings looking for that ideal abode. Often, they may not come up with the required down payment. If they have willing family members, they can request a gift as a down payment.
They can ask for a gift in order to obtain the amount they need. This allows them to get a good interest rate on the mortgage or steer clear of insurance on private that comes with conventional plans. You can use this same strategy to win a bidding war. You can do this if the seller of the house isn’t comfortable with your down payment amount.
But if you’re lucky enough to have a generous and wealthy donor who willingly wants to provide financial assistance no matter what, you always have options. But keep in mind that gifting money does have a lot of requirements:
The requirements for loan underwriting on mortgages can vary but, in most cases, you can use money received as a gift for your down payment when the property in question is owner-occupied and that you’re planning to primarily live there.
Another open option is to consider the property to be your second home, like a vacation home but this isn’t a viable option for non-owner occupied or investment properties. You can also use gifts together with any type of home loans, even the conventional ones.
VA and USDA loans already permit 100% financing. However, you can still use gifts to cover any closing costs and property valuation deficits. Together with your down payment, a gift can be very useful in covering closing costs that you must pay from your own funds.
Another use of a gift letter template is as a reserve asset, which you can turn on when needed. To demonstrate your ability to pay the loan, you can set aside a specific number of months of mortgage payments.
A great advantage to this strategy is that when you cannot get a zero-down payment mortgage, you can still purchase a home without a down payment as long as you have a donor who will help you willingly.
More often than not, it’s possible to obtain an FHA gift letter for a house’s closing costs and down payment. However, on the part of the buyer, there is a minimum contribution from their own personal funds.
For instance, if you have your eyes on a duplex which you’re planning to reside in but can only come up with 10% of the down payment which includes the gift amount, you need to make a minimum contribution of at least 5% directly from your account.
If, for instance, the home’s priced is at $300,000, you should at least have $15,000 show money in their bank account. Then you can use the gifted funds to complement your own funds to cover other costs like closing costs, reserves, and down payment.
There is, however, a loophole in this situation. If the giver lived in the same house as you for the past year or the money is from your fiancée or fiancé, then you can consider the gift amount as your own personal funds even though they are not.
If the house in question is a second residence, you usually need to pay a minimum of 5% of the buying price from your pocket. Always make it a point to check all the boxes when considering both the gift funds’ acceptability and the minimum contributions required by the borrower.
There are rules and documentation required should you decide to use a gift letter for mortgage for a house purchase. First and foremost, don’t just get the funds from someone even before speaking to the lender. This could cause problems or at least more paperwork.
According to the IRS, a gift is “Any transfer to an individual, either directly or indirectly, where full consideration is not received in return.” For mortgages, they permit gifts on areas mentioned in this treatise. But it’s also very important for you to know exactly how the IRS treats gifts specific to donor and borrower transactions.
To discern how you should treat a gift should, it’s recommended to have a conversation with a tax professional such as a CPA. Furthermore, there could also be some tax strategies you can use to help with your purchase.
There is always a possibility that not everyone has relatives who can provide gifts. In such case where a 100% financing is not feasible through the USDA or the VA, what options can you work with? It is here where you may also apply for Down Payment Assistance. This bridges the gap between the loan amount and the sales price.
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