The Rising Role of Gifts and Grants in the Home Buying Process
June 10, 2016 / Troy Rampy, Regional Vice President—Central Region
Gift funds and grants have become an increasingly popular option for qualified home buyers. There are still many potential buyers who aren't aware of how gifts and grants can make a home purchase possible. To accommodate the needs of buyers turning to loan officers for guidance on gifts and grants, here is some important information on the latest requirements.
A down payment gift is just as it sounds. A donor bestows a gift to the buyer to help pay for all or a portion of the borrower's down payment, closing costs, and/or reserves.
Gifts are becoming more common for today's home buyers, especially for first-time buyers who often need help...
Gifts are becoming more common for today's home buyers, especially for first-time buyers who often need help, even with the flexibility provided by private mortgage insurance that enables qualified buyers to make a home purchase with down payments as low as 3 percent. Without mortgage insurance, lenders typically require a down payment of 20 percent—which would be $43,520 on a home carrying the median price tag of $217,600.
There are three main rules related to making a down payment gift. The first requires the donor to be a relative, domestic partner, or soon-to-be husband or wife. The donor may not be affiliated with the purchase transaction. The second involves documented proof of the gift with a formal "gift letter" to the mortgage company containing several critical statements. The third is a verification the donor has sufficient funds to donate or a paper trail showing that the gift money has been transferred from the donor's account to the home buyer's account—usually with a bank statement attached to the gift letter.
A grant is an award that never needs to be repaid. This is what sets it apart from a down payment assistance loan.
First-time homebuyers are among those who can benefit most from a mortgage grant. A number of programs exist to assist new buyers with the costs of purchasing a home, including the Federal Homebuyer Tax Credit and state grants. Home buyers should reach out to the U.S. Department of Housing and Urban Development for information on grant programs.
It's important to note that obtaining any type of grant is often competitive. That's why many who qualify turn to mortgage payment assistance loans. These loans from state or local governments are often interest-free with accommodating terms.
Entities allowed to donate grants include churches, municipalities, non-profit organizations, a regional Federal Home Loan Bank, and public agencies. The donated grant must be documented with copies of either a letter awarding the grant to the borrower or a legal agreement specifying the terms and conditions of the grant. The letter or legal agreement must document that repayment of the grant is not expected and must also indicate how the funds will be transferred to the borrower, lender, or closing agent. The transfer of a grant must also be documented with a copy of the donor's canceled check, a copy of the settlement statement showing receipt of the check, or similar evidence. All grant documentation must also be included in the individual mortgage file.
New rules in the process
Gifts and grants from eligible donors, once excluded from satisfying the borrower's minimum borrower contribution requirements, are now allowed to satisfy the borrower's minimum contribution when all other requirements are met. That's not all that has changed.
In December 2015, United Guaranty expanded its underwriting requirements as a result of a comprehensive review of Fannie Mae materials related to the announcement of HomeReady®. Among the minor adjustments made to gifts and grants was the use of 5 percentage point debt-to-income (DTI) variance, which had been ineligible. In addition, all additional gift/grant requirements for non-occupant borrower loans were eliminated.
These recent changes in gift/grant rules simplify the home buying process. Borrowers already taking advantage of mortgage insurance to make a less-than-20 percent down payment can now utilize a grant or gift for all or part of their down payment, closing costs, and reserves. With saving for a down payment proving difficult for many, particularly for first-time buyers, this and other rule modifications usher in an easier, simpler, and more buyer-friendly age.
Troy Rampy has been United Guaranty's Regional Vice President of Production in the Central Region for 20 years and is a six-time member of United Guaranty's President's Club. He has 37 years of experience in the mortgage industry. Rampy directs United Guaranty's efforts of a team of 16 sales professionals in Texas, Oklahoma, Colorado, Kansas, Missouri, Arkansas, Louisiana, Mississippi, New Mexico and Southern Illinois. He is a member of the national Mortgage Bankers Association and the organization's chapters in Texas, Colorado, Oklahoma, Missouri, and Louisiana.
© 2016 United Guaranty Corporation. All rights reserved. United Guaranty is a marketing term for United Guaranty Corporation and its subsidiaries. United Guaranty is a registered mark. Coverage is available through admitted company only.