Gift for down payment money – What you need to know

Gifting down payment money? What you need to know.

Minneapolis, MN: A relative, usually a child has asked you to give them down payment money to buy a home.  As parents, we are usually very willing to help.  Here we will explain gift for down payment money – what you need to know.

Gift Rules:Down Payment gift money rules and guidelines fha loans conventional Minneapolis MN

First, the gift has to be from a blood relative.  There are two major and different gift rules.  One being the rules for gifting money on a conventional loan, the other gifting money for an FHA loan.

Gifted down payment typically involves extra paperwork for the person giving the gift. At a minimum, the gifting person must sign a gift letter. The gift letter has the name of the person giving the gift, their relation to the recipient, the amount of the gift, where the gift money is coming from (bank), and the fact that it is a true gift, and that the gift will never be paid back.

The rules require the gift come from a blood relative, and are designed to ensure the gift really is from the relative, not some sort of kickback from the realtor or seller. Lenders will require various levels for paper trailing the gift depending on the transaction type (conventional or FHA).

THE ACTUAL MORTGAGE GIFT LETTER

The mortgage industry uses a standard mortgage gift letter.  Be sure to tell your Loan Officer you want to use a gift for down payment, and they will provide you with the required letter. Do NOT try writing your own.

FHA DOWN PAYMENT GIFT

On an FHA loan, the entire amount needed to buy the home, both the actual down payment and any closing costs can be a gift. FHA rules require the signed gift letter, and also requires we get proof the giftor had the money to give, which means we need to see a copy of the bank statement of the account the money came out of.

PROOF OF GIFT

FHA requires proof the giftor had the money to give. This means the giftor must provide the lender with the most recent bank statement from the account the money is coming from to prove they had the money to give. Lenders will also need to see the money deposited into the buyers account, and may even request a copy of the cancelled check from the giftors account.

Alternatively, the giftor can electronically transfer the money, or give the buy a cashiers check.  If giving a cashiers check, the buyer should NOT deposit the check.  Rather, just bring the original cashiers check to closing. The lender will also need a copy of the cashiers check before closing.

Bank wire transfer from the giftor directly into the Title Company a few days before closing is also allowed, but we still need a copy of the giftors bank statement, and make sure the wire comes from the exact same account listed on the gift letter and bank statement they provided.

CONVENTIONAL DOWN PAYMENT GIFT

On conventional loans, many times, we just need just a signed gift letter.  Just like on an FHA loan, the letter (provided by your lender) will state the money is a true gift, and no repayment will ever be required.

UPDATED 2018: Current guidelines on conventional loans allow for 100% of the down payment (and closing costs) to be a gift

OLD Rules: The amount of the down payment gift is different on conventional loans:

  • – If the gift is 20% of more of the purchase price, the entire down payment can be a gift
  • – If the gift is less than 20%, the FIRST 5% of the down payment MUST be the buyers own money.

PROOF OF GIFT

Proof the gift actually came from the gifting person on conventional loans varies depending on how the gift was given.

If they gave you a personal check, just like FHA loans, we need to see the giftors bank statement showing they had the money to give, AND prove the money now in the recipients account.

If they give a cashiers check, the check MUST have the donors name in the Memo field on the check. Make sure the bank puts it there!  The recipient should NOT deposit the cashiers check. Send a photo copy to your lender, and bring that exact same cashiers check to closing.

Finally, the giftor can do a bank wire transfer of the gift amount directly into the Title Company a few days before closing. Make sure the money is wired from the exact same account listed on the gift letter.

RELUCTANT PARENTS

We often times see the gift giver reluctant to share bank statements with the gift recipient. We understand.  They often do not want the person receiving the gift to see what they have in their accounts.  This isn’t a problem, as the gift giver can send the bank statements directly to the lender…  and we promise to never share that account information with the gift recipient.

TAXES on Down Payment Gifts?

I often get asked if there is a gift for down payment tax. My best advice is to always consult a tax professional, as I am not. But in consulting my personal tax professional, here are some of the main items he indicated.

The recipient of the gift has no tax liability. It’s a gift.

For the giftor, the general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

  1. Gifts that are not more than the annual exclusion for the calendar year (slowing going up every year, so check for the current number).
  2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  3. Gifts to your spouse.
  4. Gifts to a political organization for its use.
  5. In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.

 


Low interest rate vs low closing costs. What is best?

Minneapolis, MN:  As a Mortgage Loan Officer for over 20-years, I am constantly asked the same two main questions. What is your interest rate, or what are your closing costs? The answer isn’t actually very simple. Low interest rate vs low closing costs, and what is best for you depends on many factors.

Interest Rate and Closing Costs Education

The first thing to understand is that for the most part, all lenders, regardless of them being a bank, broker, or actual mortgage company all do the same thing, have the same rates, and same costs

For example, FHA guidelines are FHA guidelines no matter who you get your loan from.  If your situation puts you on the far fringe of a programs guidelines, you may run into lenders have have an individual company risk overlay, but I am speaking about the vast majority of loan applicants. 

We all get our base interest rates based on the same mortgage backed security bond market. If my rates go up, so do theirs.  If my rates go down, so do theirs. Lenders don’t just make up rates. Today’s bond market plus our margin equal todays rates

We all have the same REAL closing costs, most of which are not actually the lenders costs. Appraisal, credit report, title company, state deed taxes, county recording fees, and initial pre-paid items of taxes and insurance are all the same, or so close as to not make a difference no matter who you deal with.

We all also don’t work for free. Anyone claiming they don’t charge a normal cost, no lender fees, or things like free appraisal are making up up somewhere else.

Interest rates can vary based on many items, including loan program, credit score, state, property type, and down payment size. because of this, my opinion is most instant online interest rate quotes are worthless. 

Different Interest Rate Quote Techniques

Differences in standard quoting techniques are everywhere, and super confusion to most home buyers. There are four main interest rate and closing cost options. Understanding all four makes you a better shopper.

STANDARD RATE QUOTE:

The traditional mortgage loan interest rate quote is based on today’s lowest rate for your situation, combined with you paying all standard and traditional closing costs. There are no discounted cost, no free appraisals, and no discount points to artificially buy down the rate. This is the most commonly quoted option.

NO LOAN ORIGINATION FEE QUOTE

The mortgage loan interest rate quote is based on today’s lowest rate for your situation, combined with you paying all standard and traditional closing costs, EXCEPT the lender does not charge you the standard 1% loan origination fee. Sounds great, but no lender works for free. The no loan origination is achieved by increasing your loans interest rate by typically 0.25%. The actual amount will vary based on program and loan size. This is the second most popular interest rate quote.

LOW RATE WITH DISCOUNT POINTS QUOTE

This option is based on today’s base rate for your situation, combined with you paying all standard and traditional closing costs, PLUS additional closing costs known as discount points to buy down your interest rate. For example, maybe you pay an addtional 1% of the purchase price in closing costs today, and this may get you and interest rate 0.25% lower. The amount of points you pay, and the actual rate change will vary based on program and loan size. This option is highly quoted on internet rate quote comparison sites.

NO CLOSING COST QUOTE

The mortgage loan interest rate quote is based on today’s base rate for your situation, but where you typically do not pay any loan closing costs, except for any initial escrow account set-up costs, like pro-rated property taxes and insurance. Again, there is no such thing as no costs, they just hide the costs in a higher interest rate. The actual increase inthe interest rate will vary based on loan size, and dollar amount of real costs the lender needs to bury into the interest rate. It is not uncommon to see interest rates 0.50% to 0.75% about the standard quote rate.

HOW TO SHOP INTEREST RATE OFFERS?

Most people call and ask “What is your interest rate.” A good question, but based on the various quoting techniques, can leave you with confusing answers for comparison purposes.

I usually advise people to PICK on of the offer options, then when contacting lenders, be sure to tell each lender you desire the same type of quote. Standard offer vs Standard offer, or no origination versus no origination.

Another good tool is to ask based on a hard closing costs number. Ask everyone for a quote based on closing costs being $7,000 for ecample. Then the only difference is interest rate.

More information on How to Shop Interest Rates

BEWARE OF LOW QUOTING TRICKS

Since the real estate collapse in 2007, rules and regulations have been improved dramatically, but there are still common tricks. The current biggest being under quoting pre-paid items of taxes and insurance.

I recently quoted a client estimated home owners insurance of $1,400 for the year. The competition quoted $700 for the year. Needless to say, the client was thrilled with the $700 cheaper quote, and wanted to go with the competitor.

I informed the client that this was just our guessing, and that whatever his insurance policy premium actually cost, would simply be passed on and adjusted in his final numbers.

I also informed him that while a guess, we are supposed to be as accurate as possible, and that maybe he should hand up and call his insurance agent.

His actual quote was $1290. So I was a little high, but the competition was way off low.

Low interest rate vs low closing costs. What is best?

There is no correct answer, and one is not better than another. Your answer lies in your individual situation.

If you are a first time home buyer who can barely come up with your down payment, you may opt for the no loan origination fee, or the no closing cost loan. Yes, your interest rate and payment will be higher, but if you don’t have the money, this may be a good option.

The next person may be selling their small first home, and buying their bigger forever home. They may also be netting a nice profit. Therefore not only do they have plenty of money for down payment and closing costs, they may also have plenty to buy the interest rate down – which saves them a lot of money over the long haul.

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Mortgage broker in MN, WI, SD

Ready to apply for a home loan?  For home mortgage loans in MN, WI, and SD, just click here to get started. If in another state, we suggest contacting a local mortgage broker in your area for the best deals and options. Joe Metzler, NMLS #274132. Equal Housing Lender. Not an offer to enter into an interest rate lock agreement.


Myths that Keep Renters from Becoming Buyers

Minneapolis, MN:  There are plenty of myths that keep renters from becoming buyers. As with many myths, urban legend, folklore, and old wives tales, there may be a little truth to the story, but most of it is false.

As a Mortgage Loan Officer for over 20-years, it is a constant battle to dispel these stories, So here are a few myths versus facts to better educate prospective home buyers.

Mortgage myths vs mortgage facts

Myth 1:

Nearly 50% of renters believe they need a down payment of 20% or more.

  • FACT: While a few programs and situations require large down payments, most don’t. There are plenty of low down payment programs like HomeReady accept as little as 3% down.  FHA loans are just 3.50% down payment. VA loans and USDA loans have no down payment required.

Myth 2:

1/3rd or renters believe they need a credit score over 700 to buy a home

  • FACT: Your best loan options are with a 640 or higher credit score, but there are also plenty of programs that will potentially approve a client with as credit low as 580.  If you have a really big down payment, all the way down to a 500 score is possible.

Myth 3:

The most common reason renter cite for not buying is the lack of down payment

  • FACT: Sure, having a big down payment helps, but down payment assistance is available for qualified buyers. Gift from parents is a popular option, as is taking money from your 401k for down payment.

There are plenty of myths that keep renters from becoming buyers, now you know the facts.

My best advice is to simply not assume anything. If you would like to own a home, and you are not sure about your qualifications, I’m always happy to review your situation, go over the numbers, and explain all your options to buy a home.

If we can’t help you today, we will go over what would be needed in your situation to help you tomorrow. You have nothing to lose, and everything to gain.

If you are looking to buy a home in Minnesota, Wisconsin, or South Dakota – I can help.  Simply call me at (651) 552-3681, or apply online at www.FirstTimeHomeBuyer-MN.com.

Mortgage application

If you are in any other state, I suggest you contact a local mortgage broker in your area. Stay away from the big banks and the large Internet Lenders.