We strive to help lenders bring the dream of homeownership to more people – that’s why it’s important for those of us in the industry, especially underwriters, to help educate on all parts of the mortgage loan process. Gift funds, in particular, are a subject that may sometimes need clarification: let’s jump in.
As you know, mortgage insurance (MI) is a tool for lenders to help borrowers establish an affordable path to homeownership, so they can put less money down. On average, it can take up to 10 years to save for a 20% down payment. That’s where MI comes in, as we insure with as little as 3% down, helping the borrower to not totally liquidate their savings and/or investments.
However, some borrowers do not have enough assets available to them to pay the closing costs. Those borrowers can utilize gift funds and/or a gift of equity from acceptable donors.
What is a Gift?
A borrower of a mortgage loan secured by a principal residence, or second home may use funds received as a personal gift from an acceptable donor. Gift funds may fund all or part of the down payment, closing costs, or financial reserves subject to the minimum borrower contribution.
Please note: Fannie Mae and Freddie Mac guidelines do not allow gifts on an investment property.
What is a Gift of Equity?
A gift of equity refers to a gift provided by the seller of a property to the buyer. The gift represents a portion of the seller’s equity in the property. Then, it is transferred to the buyer as a credit in the transaction.
This is permitted for a principal residence and second home purchase transactions. It may be used to fund all or part of the down payment and closing costs (including prepaid items).
Note: A gift of equity cannot be used towards financial reserves.
The acceptable donor and minimum borrower contribution requirements for gifts also apply to gifts of equity. When a gift of equity is provided by an acceptable donor, the donor is not considered to be an interested party and the gift of equity is not subject to interested party contribution requirements.
What are the documentation requirements for gifts?
Gifts must be evidenced by a letter signed by the donor, referred to as a gift letter. The gift letter must:
- specify the actual or the maximum dollar amount of the gift
- include the donor’s statement that no repayment is expected; and
- indicate the donor’s name, address, telephone number, and relationship to the borrower
When a gift from an acceptable donor is being pooled with the borrower’s funds to make up the required minimum cash down payment, the following items must also be included:
- A certification from the donor stating that he or she has lived with the borrower for the past 12 months and will continue to do so in the new residence.
- Documents that demonstrate a history of borrower and donor shared residency. The donor’s address must be the same as the borrower’s address. Examples include but are not limited to a copy of a driver’s license, a bill, or a bank statement.
What are the documentation requirements for a Gift of Equity?
- a signed gift letter, and
- the settlement statement/closing disclosure reflecting the gift of equity
What is needed to verify the donor’s availability of funds and transfer of gift funds?
The lender must verify that sufficient funds to cover the gift are either in the donor’s account (such as a checking, savings or investment account owned by the donor) or have been transferred to the borrower’s account. Acceptable documentation includes the following:
- a copy of the donor’s check and the borrower’s deposit slip,
- a copy of the donor’s withdrawal slip, and the borrower’s deposit slip,
- evidence of the electronic transfer of funds from the donor’s account to the borrower’s account or to the closing agent
- a copy of the donor’s check to the closing agent, or
- a settlement statement/closing disclosure showing receipt of the donor’s check.
- When the funds are not transferred prior to settlement, the lender must document that the donor gave the closing agent the gift funds in the form of an electronic transfer, certified check, a cashier’s check, or other official check.
Want even more information?
If you have questions about Gifts and Gifts of Equity, feel free to reach out to your Regional Underwriter at 800-444-5664, Option 2. Be sure to make the most of your MI experience. Please explore our many underwriting resources for more information. Because going the extra mile comes easy for us, we also offer a comprehensive suite of training resources to help boost your industry experience.
Source: Natalie Stokes is a Regional Underwriting Manager for Enact, with over 23 years of underwriting experience.
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