A common challenge for potential homebuyers is not having the personal funds to meet their required down payment for their chosen home. Using gift funds to help finance the purchase of home is a common strategy, particularly for first-time homebuyers. But what constitutes a gift fund?
In this article, our very own Donna Muratalla, Regional Underwriter, will discuss how personal gift funds can play a vital role in accomplishing the dream of homeownership, what they are, and the GSE requirements for use of these funds.
What are gift funds?
Gift funds are monetary gifts that assist the borrower(s) with the down payment to purchase a home.
Who can grant gift funds?
A gift donor may be a relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship, or a non-relative that shares a familial relationship with the borrower defined as a domestic partner (or relative of the domestic partner), individual engaged to marry the borrower, former relative, or godparent. Government programs as well as Employer Assisted Benefits may also be eligible donors.
Additionally, a trust established by a related person, or the estate of a related person are also permitted to grant gift funds.
Please note that the gift donor may not be, nor have any affiliation with, the builder, the developer, the real estate agent, nor any other interested party to the transaction. There is a caveat though: Gift funds from the seller who is also an acceptable donor and not affiliated with any other interested party to the transaction are permitted. The donor of a gift of equity is not considered an interested party to the transaction.
Additionally, when the borrower receives a gift from an acceptable donor who has lived with the borrower for the last 12months, those gift funds are then considered the borrower’s own funds and may be used to satisfy the minimum borrower contribution requirement as long as both individuals will use the home being purchased as their principal residence.
Are wedding or graduation gifts permitted?
Both Fannie Mae and Freddie Mac permit Wedding Gifts from both unrelated persons and/or related persons as an eligible source of funds for a mortgage secured by a Primary Residence. The wedding gift funds must be documented as on deposit in the Borrower's depository account within 90 days of the date of the documented marriage license or certificate.
Freddie Mac will permit Graduation Gift funds from both unrelated persons and/or related persons as an eligible source of funds for a mortgage secured by a Primary Residence. The graduation gift funds must be documented as on deposit in the Borrower’s depository account within 90 days of the documented date of graduation. Evidence of graduation from an educational institution (e.g., diploma or transcripts) that supports the date of graduation is required.
To learn more about specific gift funds, check out the Selling Guides for Freddie Mac and Fannie Mae.
What occupancy type is permitted when gift funds are granted?
Gift funds are an acceptable source of funds when purchasing a one- to four-unit primary residence or second home. Also, consider adding that the GSEs do not allow gift funds to be used when purchasing an investment property. When the loan-to-value is greater than 80% and the property is a two- to four-unit primary residence or a second home, the borrower must make a 5% minimum borrower contribution from their own funds.1 After the minimum borrower contribution has been met, then gifts can be used to cover the remaining down payment, closing costs, and reserves.
1 On loan-to-values above 80%, Fannie Mae’s HomeReady Program does not require a minimum borrower contribution on one-unit primary purchases. However, under the HomeReady Program for loan-to-values greater than 80%, a 3% minimum contribution from the borrower's own funds is required for two- to four-unit primary residences unless there is any type of grant.
If the loan-to-value is 80% or less, one- to four- unit primary and second home transactions permit gift funds and borrower contribution from their owns funds is not required. All funds to complete the transaction may be derived from gift funds.
What documents are required when personal gift funds are used in the loan transaction?
Step 1: Gifts must be evidenced by a letter signed by the donor, often referred to as a "Gift Letter"
When the gift is sourced by a trust that has been established by an acceptable donor or an estate of an acceptable donor, the gift letter must be signed by the trustee or authorized representative of the estate as well as list the name of the trustor the estate account.
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
- indicate the donor's name, address, telephone number, and acceptable relationship to the borrower
Note that for Fannie Mae DU loans: If the actual amount of the gift received is different than the amount used to underwrite the loan casefile in DU, the lender may need to resubmit the loan casefile to DU in accordance with B3-2-10, Accuracy of DU Data, DU Tolerances, and Errors in the Credit Report. For manually underwritten loans, the lender must verify the borrower has sufficient funds for closing, down payment and/or financial reserves.
When gift funds from an acceptable donor are pooled with the borrower’s funds to meet the required minimum cash down payment, the following additional items must also be included:
- A certification letter from the gift donor stating they have lived with the borrower for the past 12 months and will continue to do so in the new residence.
- Documentation that demonstrates the history of the borrower and the acceptable donor having a 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.
Step 2: Verify the Donor's Availability of Funds and Transfer of Personal 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, or trust or estate 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 showing receipt of the donor’s check.
- For an earnest money deposit paid by the donor directly to the builder or real estate agent, the transfer of funds from the donor’s account in a financial institution to the earnest money deposit holder must be documented. For example, a copy of a canceled gift check, a copy of a cashier’s check or wire transfer confirmation (Freddie Mac only).
- Funds transferred using a third-party money transfer application or service are acceptable only when the documentation included in the Mortgage file evidences that the funds were transferred using the application or service directly from the donor’s bank account to the Borrower’s bank account or to the settlement or closing agent.
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.
Always refer to the Fannie Mae and Freddie Mac selling guidelines as there may be some variance in their requirements – plus, they’ll help you stay up to date on the most recent requirements for each of your borrowers’ unique needs.
More ways we at Enact can help
When working on loan transactions where your borrowers are using personal gift funds, your Enact MI team has got you covered. Our Regional Underwriting Team is available to assist you Monday-Friday 8am to 8pm ET at 800-444-5664 option 2. We look forward to working with you!
Be sure to make the most of your MI experience, too. Please explore our many underwriting resources and underwriting tips 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: Donna Muratalla is a Regional Underwriter for Enact.
