Gift funds are still a top question I receive in underwriting, even though the rules have not really changed since I started in the mortgage business. I want to provide the answers to the most frequently asked questions I receive, and the supporting guidelines to help you!
First things first, the answers below to the top 5 questions can be found in the guidelines under
FNMA B3-4.3-04 dated 09/29/2015 and;
FHLMC 5501.3 03/06/2017
Question 1- Who can give gift funds?
For conventional loans, this is an area where the guidelines are more liberal than government loans. Both FNMA and FHLMC allow gifts from a spouse, child, another dependent, or any other individual who is related by blood, marriage, adoption, or legal guardianship. In addition, you can get gifts from a fiance or domestic partner (with some additional information about time living together)
The key to confirming someone is an acceptable donor is to ask yourself these two questions.
Question one: is the donor a dependent/blood relative/ marriage relative?
Question two: does the donor have any affiliation with the builder, developer, real estate agent, or any other interested party?
If you can answer yes question one and no on question two, the donor meets the requirements.
One more thing to consider, sometimes I am asked what documentation do you need to show to confirm the relationship between the donor and the borrower. The answer is
Question 2 – Do we have to source the donor’s funds to accept the gift?
The simple answer is no, this is another area where conforming guidelines are easier to meet than government guidelines. I will also throw in a request to sales from my many underwriter friends out there, please don’t include bank information about your donor, it just confuses things!
The requirements for both agencies only state that we confirm the transfer of the money from the donor (listed on the proper gift letter) to the borrower. This can be accomplished by presenting the canceled check, evidence of a wire transfer in the borrower’s account (and showing the donors name), or a copy of the money order.
Question 3 – Can gift funds be used for reserves?
Yes, gift funds on eligible transactions can be used for all or part of the down payment, closing costs, or financial reserve requirements (subject to the minimum borrower contributions based on property and occupancy type).
Question 4 – Can all of the down payment come from gift funds?
For primary residences that are a single family, the answer is yes. The guidelines do not require any borrower contributions on a single-family residence (SFR attached or detached, condo, PUD, and Co-Op).
Where the restrictions come in to play is when the subject is a primary 2-4-unit property or second home, in these cases the borrower must have a 5% minimum contribution to the transaction. Of course, of the property is an investment property no gift funds allowed on those transactions!
Question 5 – Can the borrower use gift funds to pay off debt to qualify
Yes, a borrower can use gift funds to pay off debts. Per the guidelines gift funds can be used for all or part of the down payment (see question 4) , closing costs, or financial reserve requirements, the guidelines do not impose any limit to the use in a transaction.
Hopefully, this list has been helpful to you. At UberWriter we have a library of on-demand training videos that go over many topics about underwriting and guidelines. Tap into expert guidance on-demand. For more details go to www.uber-writer.com/training.