FHA-Backed HECM Reverse Mortgages 101

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Imagine being mortgage-free or having access to tax-free money that can be used to cover any one of life’s major expenses?

For eligible American homeowners aged 62 years or older, this can be a reality thanks to Home Equity Conversion Mortgages (HECM’s). Backed by the Federal Housing Administration (FHA), these reverse mortgage programs enable seniors to take out some of the equity in their homes and even choose how they withdraw the money.

For those who are comfortably able to make their mortgage payments and have other assets and equity, a reverse mortgage might not make a lot of sense. But for those who are strapped for cash and have plenty of equity in their homes, an HECM can help them access otherwise unavailable money that can be used as they see fit.

What Exactly is an HECM Reverse Mortgage?

This reverse mortgage program is a specialized type of home loan that allows eligible candidates to convert a portion of the equity in their homes into liquid cash. Any equity that has been built up during the years of ownership can then be paid out to the borrower and be used in a variety of ways, including purchasing a primary home.

The difference between an FHA-backed HECM and a typical home equity loan is that the HECM loan doesn’t have to be paid back until the borrower is either unable to meet the criteria for the program or the home is no longer considered the borrower’s principal residence. 

As long as the borrower lives in the home, the majority of the loan proceeds will typically be paid out over time instead of upfront, and with no repayment obligations. Any upfront costs of an HECM – including origination fees, appraisal fees, and title insurance – are typically included in the mortgage with no cash expenditures required from the borrower.

The lender involved pays the borrower, and the reverse mortgage balance increases while accruing interest and fees. Lenders are paid back when the borrower either sells the home or dies. The FHA pays the lender the difference if the sale price of the home is less than the loan amount.

Eligibility Requirements For HECM Approval

Age is not the only requirement needed to qualify for approval for an HECM reverse mortgage program. In addition to being aged 62 or older, homeowners must outright own their homes or be very close to fully paying off their mortgages which can be paid off with the proceeds from the reverse mortgage.

Since the home will still be subject to property taxes and insurance, among other things, candidates must also have the financial means to comfortably cover ongoing expenses. Last but not least, the home in question must be deemed the borrower’s primary residence.

As far as the home is concerned, it must be a single family home or a property with between two to four units, one of which must be occupied by the borrower. Manufactured homes that meet FHA requirements and condos that are HUD-approved also qualify.

Payout Options From an HECM Reverse Mortgage

There are various ways that borrowers can get paid out with an HECM, including the following:

  • Lump sum payment at mortgage closing
  • Equal monthly payments
  • Line of credit
  • A combination of the above three

What Happens When the Borrower Sells the Home or Passes Away?

If the home is sold or is no longer being used as a primary residence, the money and interest will have to be repaid. The borrower’s estate or spouse will receive the equity in the home if the borrower dies or sells the property. The equity is calculated using the net property value after all transaction costs have been deducted, minus the balance remaining on the HECM.

The borrower’s estate can obtain title to the home after the borrower passes away by paying off the HECM debt. If the property value exceeds the balance remaining on the debt, there are no issues that need to be dealt with. On the other hand, if the property value does not cover the debt balance, it’s up to the estate to assume this debt or not.

Is There a Risk of Losing the Home Under an HECM Reverse Mortgage?

Thanks to recent regulatory changes made by the U.S. Department of Housing and Urban Development (HUD), HECM reverse mortgages come with more safety measures today than they did in the past. HECM reverse mortgages give seniors the opportunity to tap into a part of their home equity to get rid of their monthly mortgage payments and use tax-free funds without having to use other retirement resources.

The only risk associated with a reverse mortgage has to do with the borrower being unable to meet their contract’s obligations, which is no different than a typical mortgage. If there are any defaults on specific obligations, such as paying property taxes and insurance, the borrower will be considered in default and could have their house placed under foreclosure. But at the end of the day, borrowers have total control over any risks assumed with an HECM.

The Bottom Line

Reverse mortgages are not for everyone, but for specific individuals, they can prove to be very valuable. Seniors who are sitting on a lot of home equity and are receiving a very small monthly income may find an HECM reverse mortgage very helpful at freeing up money that they otherwise wouldn’t have to continue living a comfortable life in their Golden Years.

Problems That Could Arise if Buyers Move in Before Closing

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Usually, buyers move into a home they purchased only after escrow closes, but there are times when buyers get possession of the home before closing. While not very common, buyers who ask to move into the home before closing might have a variety of reasons to do so. Perhaps their home has sold and is closing shortly, or maybe they’ve been renting and their lease is expiring soon. In these cases, they’re going to need a place to live before they vacate their home or apartment.

It’s not difficult to see how this situation can become problematic. After all, buyers are not yet on title when the home is in escrow, and are essentially living in a home that’s not yet theirs. If a seller agrees to allow a buyer to move in before closing, both parties need to be aware of the potential issues that could occur in this impractical situation.

Here are some potential downfalls that can be faced with early buyer possession from the perspective of the seller.

The Closing Could Take a Lot Longer Than Anticipated

There could be any number of reasons for a delay in closing. In the meantime, the proceeds of the sale are still stuck in escrow that the seller could be using to put towards the new mortgage. Whether there are issues with title that need to be dealt with, additional documents that the lender needs before financing goes through, or problems with the appraisal, any delays in closing can leave sellers concerned about whether the deal will close at all, while strangers are living in their home. 

The Sale Falls Through

While the majority of real estate deals close escrow successfully, there are times when sales fall through. It could be that the buyer is unable to secure financing, or perhaps there are problems with the closing documents.

If this happens, not only are sellers in the position to have to start marketing the property all over again, they also have to contend with buyers that now must vacate the premises that they believed was already theirs. In the meantime, they could have made changes to the home, or may have even trashed the place after learning the deal was dead.

The costs associated with fixing up the house before listing it can be pretty high. The carrying costs of the home, including mortgage payments, insurance, taxes, maintenance, can also add up. In addition, the home might not even sell for the same amount compared to the first time around if the market has changed since then.

Defects Are Discovered That Could Deter Buyers From Going Through With the Sale

Sometimes issues with a home are not noticed by buyers during scheduled showings. That’s why home inspectors are brought into the picture in order to uncover potential issues, but it’s not inconceivable for problems to be discovered until after buyers move into the home.

It’s possible for buyers to find out about certain defects in a home after they’ve moved in. Whether the seller was unaware of the issues or simply did not disclose them, such defects can turn buyers off to the point that they may decide to cancel the deal (if the necessary clauses are inserted in the contract) and request to have their deposit returned.

The Buyers May Make Additional Requests Before Closing

If buyers want any repairs rectified before closing, these should typically be listed in the original purchase agreement. However, it’s possible for buyers to add to this list after they’ve moved in and taken a closer look at the home. Most of the time they’re minor issues that the buyers simply just want to see changed, which can be really annoying if there was a home inspection and the repair process has already been discussed.

Insurance Coverage Could Be Unclear

If all goes well, there will be no need to have to make an insurance claim. But what if something happens that warrants a call to the property insurance provider? Who is responsible if the home is damaged or someone gets hurt on the property while the buyers are in possession? Is it the buyer, who’s living in the home, or the seller, who technically still owns it? Things can get really complicated when it comes to insurance coverage on a home that’s under one person’s name with the soon-to-be owner already living in it.

The Bottom Line

A buyer moving into a home before closing is certainly not an ideal situation, but if it does happen, it should only be carried out after both parties have spoken with their respective real estate agents or lawyers.

A written contract should be drafted to specifically detail the terms of this agreement. It should include a per diem fee that the buyer would have to pay the seller for every day that they are living in the home to cover costs until escrow closes, as well as stipulations about how and when the deposit will be returned if closing doesn’t go through. Buyers should also have their own liability insurance in case of any incidents that might happen during the early occupancy period. Real estate professionals can provide a contract addendum that deals specifically with early buyer possession.

What Buyers Should Know About Saving on Prepaid Interest

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It’s often recommended for buyers to close at the end of the month – or at least as close to it – in order to avoid being stuck with having to pay more prepaid interest when the deal closes. This is often a good strategy to save money, but it needs to be fully understood in order to find out how much money truly is saved at the end of the day.

For starters, what exactly is prepaid interest? Simply put, it is mortgage interest that’s paid in advance. Mortgage interest is paid out in arrears, unlike rent, which is paid in advance. That means a mortgage payment that’s made on May 1st pays for the interest from April.

Borrowers usually prepay their mortgage interest on a new home loan or when refinancing an existing mortgage. The interest will be paid up to 30 days away from when the first mortgage payment is due. If your home closes on May 15th, for instance, the first mortgage payment will need to be paid on July 1st. In this case, the July payment will cover the interest for June, and the amount due to cover the time period from May 15th to the 31st will be paid at closing of escrow.

This payment is what’s known as “prepaid interest,” which essentially covers the time period during the month between when the lender closes the mortgage and the date that the first mortgage payment is due.

How Closing Near the End of the Month Can Save on Prepaid Interest

Using the above example, you would have to pay 16 days of prepaid interest (from May 16th to the 31st) at closing if the loan closes on May 15th. On the other hand, you can avoid paying much in prepaid interest if the loan closes near the end of the month. While this might not amount to much in some cases, it can result in significant savings in many other scenarios, particularly if the home loan amount is quite high.

Buyers who are struggling to come up with all the upfront closing costs might find closing near the end of the month a great way to save a few bucks in prepaid interests, no matter how nominal the amount may be. 

What Are the Downfalls of Closing at Month-End?

Borrowers should also carefully consider closing dates in terms of how soon their first mortgage payment will be due. While you will have to come up with the 16 days worth of prepaid interest amount based on the previous illustration, you won’t have to worry about having to make your first mortgage payment until July 1st. That’s quite a bit of time to prepare yourself for your first official payment.

Now consider paying just a day or two worth of prepaid interest if you close at the end of the month, say, on May 30th. In this case, you’d be saving quite a bit of money in prepaid interest, but your first mortgage payment will come much sooner compared to the previous scenario.

As such, month-end closings mean buyers will pay less in prepaid interest, but they’re only skipping one monthly mortgage payment. Closing earlier in the month, however, might mean more money paid in prepaid interest at closing, but two monthly payments can be skipped. At the end of the day, it’s not just important to figure out how much you can save, but how the date of closing that you choose can impact your cash flow.

In addition, it’s important to consider the fact that escrow and title companies are typically swamped with closing deals since the vast majority of real estate contracts close at month-end. This traffic jam at the end of the month can increase the odds of delays, which can actually wind up pushing the closing out to the beginning of the following month. At that point, buyers will need to fork over more money for the additional prepaid interest.

The Bottom Line

Closing towards the end of the month can certainly save you money in prepaid interest. However, there are other considerations to make, including how soon the first mortgage payment will need to be made and the potential for delayed closing due to busy lender schedules. Carefully consider your financial situation and determine whether you’d benefit more from cutting down on closing costs or delaying that first hefty mortgage payment.

Common Reasons Why Pending Sales Never Make it to Closing

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Whether you’re on the buying or selling end of a real estate transaction, making it all the way to offer acceptance is a huge, rewarding step. Unfortunately, the deal isn’t quite done yet: you still have to make it to final closing. While the majority of deals go though with little or no issues, there are still the odd transactions that fizzle out before the closing date. 

At the end of the day, anything can happen during escrow. There are a variety of reasons why pending sales never make it to closing after a purchase agreement is signed off by both parties, some more common than others. 

Financing Falls Through

One of the biggest reasons why pending sales fall through is the failure for buyers to secure financing. Before the financial bust in 2007/2008, it wasn’t that hard for buyers to get approved for a mortgage. Lending criteria was a lot more lax back then, so sellers didn’t really concern themselves too much with the possibility of the sale falling through as a result of failed buyer financing.

Since the housing crisis nearly a decade ago, it’s been a lot tougher to get approved for a home loan, which his why trouble with buyer financing is one of the most common reasons why sales falter.

Appraisals Come in Low

Home loan application rejections aren’t always the result of buyers failing to meet the stringent criteria for income, finances, and credit scores. Low appraisals are also to blame. Lenders don’t always approve mortgages if appraisals comes in too low. This can often happen in multiple offer situations and bidding wars where homes sell for a lot more than the asking price.

Lenders will only loan out the amount equivalent to (or less than) the market value of a property, so if the home’s value is appraised lower than the purchase price, the buyer won’t be able to secure the full mortgage amount.

In this case, the buyer will have to come up with a lump sum of money to make up the difference, or else the mortgage will be denied. If the seller is unwilling to renegotiate for a lower price, the deal is as good as dead.

Home Inspections Reveal Major Problems

The home may have seemed to be in decent shape during the original walk-though, but other issues may have been lurking that were never noticed. That’s precisely why it’s recommended for buyers to include a home inspection contingency in their purchase agreements, which will provide the opportunity to have a licensed home inspector take a few hours to snoop around in detail to uncover any potential issues that may require repair.

While many problems are simple and affordable to fix, others can take months to rectify and cost an arm and a leg. Structural issues, in particular, tend to be the real deal-breakers after being discovered in a home inspection. If the buyer is not comfortable with the results of a home inspection, the deal may be renegotiated or the buyer can simply walk away from the deal. 

Title Searches Reveal Significant Issues

Most title searches don’t turn up anything significant. However, there have been times when outstanding liens, public errors, or past bankruptcies are discovered, which can delay closing until such issues are rectified or even kill a deal altogether. There may also be instances where there are missing heirs who are on title to the property that may not have been included in the sale. Legally, every person on title needs to agree to a sale and put their signatures on the contract. If at least one person who’s legally on title has not signed off on the contract, escrow cannot close.

It should also be noted that lenders require title insurance to protect the property, which is essentially collateral for the loan. If the borrower defaults on the mortgage and a faulty title determines that the property is not actually theirs, the lender will have no recourse in getting back the loaned amount.

Buyer Can’t Sell Their Current Home

If the purchase agreement is contingent on the successful sale of the buyer’s current home, the deal can fall through if the home hasn’t sold in the time period specified. Not too many buyers are able to afford two homes at once and make two mortgage payments, which is why they may want to insert this contingency in the first place.

It’s often not recommended for sellers to sign a contract with this contingency for this specific reason. In addition, it could take weeks, or even months for buyers to sell their homes. In the meantime, sellers are sitting around waiting for this contingency to go through. During this time, there could be a number of other opportunities to sell during this time period, after which a final closing isn’t even guaranteed. Offers that are contingent on the sale of the buyer’s home have a much higher chance of falling through compared to those without this contingency.

The Bottom Line

It’s exciting to finally get to the point of offer acceptance, but it’s extremely disappointing to find out that the deal will never actually close for any number of reasons when you’re so close to the finish line. The truth is, there are plenty of reasons why pending sales fall through, and it’s important to be realistic about this possibility. Having said that, it’s helpful to be aware of these common reasons why pending sales don’t make it to closing. It’s also imperative to have an experienced real estate professional representing you so that you have the best chances of going from “pending sale to “sold.”

Is it Time For a Price Reduction on Your Listing?

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Your home has been on the market for a few weeks now with no offers coming in, despite all the showings that have been booked. What could be the problem?

Getting feedback from prospective buyers is important in order to gain valuable insight into potential issues with your home that warrant attention. Maybe the problem is as simple as improper staging. Perhaps there’s a foul odor in your home that’s turning buyers off. Or maybe there are many components in the home that need repair.

These are all simple fixes. But what if the issue is the actual listing price of your home? If it’s been priced above what the current market dictates, that could be precisely why the listing is lingering without a bite.

Pricing your home appropriately from the get-go is a critical step in the listing process. The right price is one that’s in line with what other similar homes in the neighborhood have sold for in your market and accurately reflects your home’s value. By pricing right, you’ll be better able to attract more buyers shortly after your listing goes live.

If you overprice your home, buyers who are in the market to make a purchase within the actual market value of your home will miss your listing completely. You’re much better off pricing correctly at the very beginning rather than trying to go for top dollar in order to maximize the number of qualified buyers that your home attracts.

When priced right, homes shouldn’t take any more than 30 days to sell, on average. If it’s been weeks since you’ve listed, a price reduction might be warranted. No seller wants to have to reduce the price of their listing, but if the price is realistically too high for the current market, no prudent buyer will willingly pay more than what a home is truly worth.

When Should You Reduce Your Listing Price?

Before you drop the price on our listing, take into consideration any seasonal factors that come into play, whether it’s a buyer’s or seller’s market, and the average time to sell similar homes compared to how long your listing has been on the market.

During slower times of the year, it might not be uncommon to only get a handful of showings within a month’s time. Back-to-school focus, holiday vacationing, consumer confidence, the economy, and other factors can lead to a sluggish market. You don’t have to quickly reduce the listing price on your home during slow periods, unless you’re in an urgent need to move.

On the other hand, properties are snatched up just as quickly as their listings go live during a hot seller’s market. In California, the market seems to be a perpetually hot one, so if your home isn’t garnering many showings or offers after weeks have gone by, the price is something that you seriously need to look at.

Another important consideration to make is how your home stacks up compared to others on the block. If your home is a unique one that only appeals to a limited pool of buyers, it might take a little longer than usual to find the right buyer.

For example, maybe your home only has two bedrooms and you live in a three-bedroom area, or perhaps your home is a bungalow in a two-story neighborhood. If your home is missing a crucial component, you might need to stick it out a little longer – within reason – until the right buyer emerges. Just make sure you follow the advice of your real estate agent in terms of just how long you should hold out before a price reduction is called for.

How Far Should You Drop the Price?

If you and your real estate agent have determined that a price reduction is necessary after careful consideration, your next step is to determine exactly how low you should go. At this point, it’s critical to implement a sound price reduction strategy to make sure that the price you pick is the right one.

At the end of the day, the price cut must be in line with what the current market in your area dictates and will help attract qualified buyers in the area. Essentially, the new price that you select should appeal to a larger pool of buyers. Obviously, the lower you drop the price, the more it will attract buyers. After all, buyers are always looking for a good deal. However, you don’t want to drop the price too far or you’ll be leaving money on the table.

Having said that, the price reduction should be just enough to trigger a response from buyers and attract their attention. Merely decreasing the price by a couple thousand dollars, for instance, isn’t going to have much of an effect on boosting showings and bringing in the offers. 

Lowering the price in small increments is a big mistake. Small reductions won’t generate very much excitement and won’t attract a new set of prospective buyers. Not only that, buyers who’ve already seen your home will take notice of this and exploit the situation to give them more negotiating power.

Of course, you should listen to the advice from your real estate agent who will provide you with a sound suggestion based on a comparative market analysis (CMA). By taking a look at what similar homes in your neighborhood have recently sold for, you will have a much better idea of where to price your home at that will make it more competitive, which is the price it should have originally been listed at in the first place.

The Bottom Line

A price reduction isn’t a decision to make lightly. However, after ruling out all other potential reasons why your home is still sitting on the market with little action and determining that the home is overpriced, dropping the price down to fair market value is likely a wise decision. Obviously, pricing right from the start is always the best decision. Sellers always want to get the most money for their homes, but overpricing is not the way to go about it.

Minimum Property Standards For FHA Home Loan Approval

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For homebuyers who are struggling to come up with a minimum 5% down payment that conventional mortgages require, an FHA-backed home loan can sometimes be the best route to take. The criteria is also not as strict as conventional mortgage programs, which means stellar credit isn’t always mandatory to be accepted.

However, in addition to homeowners having to be eligible for an FHA mortgage, the home they plan to purchase must also meet specific standards in order to get approval. In fact, property requirements are a critical component of the FHA program. While it may be the seller’s responsibility to bring a home up to par, sometimes the buyer may be on the hook to make the necessary updates depending on how the buyer’s purchase offer is drafted up.

Having said that, the minimum property standards that are required by the U.S. Department of Housing and Urban Development (HUD) are mainly concerned with a home’s safety, security, and structural soundness. The HUD also specifies certain conditions that properties must meet in order to successfully fulfill these requirements.

A bank-approved appraiser will take a look at the property’s condition, then submit the appraisal report to the lender before an FHA loan is approved. Generally speaking, cosmetic issues, minor flaws, and normal wear and tear are not looked at as long as they don’t have an impact on the property’s level of safety, security or structural soundness. That includes things like cracked window glass, missing handrails, worn out flooring, or debris, for instance.

Here are the basic requirements that properties must meet in order for an FHA home loan to be approved.

  • Septic systems must operate efficiently. If they don’t, issues that could affect their operation, such as topography and soil permeability, will be looked at and will need to be remedied.
  • No hazards should be present, such as close proximity to hazardous waste sites, gas wells, flammable items, high-voltage power lines, or transmission towers. In addition, the soil surrounding the property cannot be contaminated.
  • No nuisances should be present, including noise due to heavy vehicular traffic or airplanes.
  • Access to the property must be safe and satisfactory for pedestrians, regular vehicles, and emergency vehicles under any weather conditions.
  • The structure cannot be compromised as a result of excess moisture, sub par construction, leakage, termite damage, and sloping settlement.
  • Electrical boxes cannot have any exposed or damaged wires.
  • Electricity must be available to operate lighting and any installed systems.
  • Roofs must be in decent condition deemed not to require replacement any earlier than two years. In addition, they cannot have any more than three layers, and must be able to adequately keep moisture out.
  • Attics and crawlspaces cannot have any excess moisture and must have some type of adequate ventilation.
  • Water heaters must meet local building codes.
  • Any presence of asbestos warrants additional attention from an asbestos professional.
  • A working toilet, sink, and shower must be present.
  • Kitchen appliances, including a functional stove, must be present.
  • No major plumbing issues and leaks should exist.
  • HVAC systems must be in proper working order.
  • No rotting of the exterior, including walls and window sills, can be present.
  • Exterior doors must properly open and close.
  • There must be a sufficient water supply, including hot water, drinkable water, and an acceptable method to dispose of sewage.
  • No active pest infestation may be present.
  • The home must have adequate grading on all sides to allow for proper drainage.
  • Bedrooms must have minimize-sized windows.
  • Swimming pools cannot be empty nor have an inoperable pump.
  • Fencing cannot be leaning or broken.

This list is by no means exhaustive. A more detailed list is outlined in the HUD Handbook 4150.2, chapter 3, which can be accessed online.

What Happens if the Property Does Not Meet FHA Requirements?

If you’re planning to buy a home that falls short of the FHA’s stringent requirements, start by working with the seller. Ask them if they can make any of the necessary repairs. If not, consider negotiating a lower purchase price to cover the costs associated with having to make these repairs yourself. Some issues will definitely be deal breakers, but others might be able to be dealt with before closing.

If all else fails, you may be stuck looking for another home if the list of repairs is just too lengthy to make the home worth your time, effort, and money. Or else, trying to get approved for a different mortgage product may be necessary in order to avoid having to ensure the subject property meets all the FHA’s requirements.

Of course, the lender will have a separate set of criteria that you will have to meet in order to get approved for a home loan. There is also the option of applying for an FHA 203(k) loan, which allows buyers to purchase homes that have major problems.

The Bottom Line

While an FHA mortgage might be easier to get approved for, it can actually make it tougher to close on a home based on various issues that may come with the property.  It’s important to be fully aware of what to expect when choosing an FHA loan, as it can restrict the properties that you might have on your short list.

What You Should Know About Down Payment Gifts

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Coming up with a sizeable down payment these days can be pretty tough, especially when you consider the soaring home prices that buyers have been facing lately. Conventional mortgages require at least 5% down, but a minimum of 20% is needed in order to avoid having to pay the extra costs associated with private mortgage insurance (PMI).

Saving up for a down payment is an absolute must, but you might still find yourself coming up short despite your best efforts. This is especially true for first-time homebuyers who don’t have equity in a previous home to put towards a new home purchase.

If you’ve got family members who are willing to help you out financially to pad your down payment, you’re lucky. But even then, you may be dealing with a whole new set of potential complications if the situation is not handled properly.

Before you graciously accept any monies that are extended to you for your down payment, there are a few things that you need to know first.

Down Payment Gift Donors Can’t Have Any Stake in the Transaction

Lenders usually won’t permit any down payment gifts from just anyone. An individual who might benefit from the transaction will not be allowed to contribute to the gift, such as a mortgage broker, sales agent, or seller. Down payment gifts typically need to come from a family member, including a parent, sibling, or grandparent.

In some cases, lenders may also allow cash gifts from a spouse, partner, or fiancé(e). There may even be times when the lender may consider allowing a cash gift for a down payment from a non-relative, but usually only for FHA loans, and only if the case is a strong and convincing one.

There Are Rules About How Much Can Be Gifted

If you’re putting down at least a 20% down payment towards your home purchase with a conventional home loan, all of the down payment can be in the form of a gift. If you’re putting down less 20%, a portion of that amount can be a gift, but the rest will have to come from your own funds. How this amount is divided between you and the gift giver will depend on the exact type of mortgage you are applying for.

If you’re taking out a mortgage that’s backed by the government – such as an FHA or VA home loan – the whole down payment can be a gift if your credit score is healthy. If it’s below 620, you will have to come up with a minimum of 3.5% down from your own personal funds. 

For FHA- and VA-backed home loans, you can only use gift money to put towards primary residences and second home purchases, whereas gift money for conventional loans can only be used towards the purchase of a primary residence.

There Must Be a Proper Paper Trail

Detailed documentation must accompany the cash gift being put towards your down payment. For starters, a letter must be submitted, which includes the following details:

  • Date
  • Borrower’s full name
  • Gift donor’s full name and contact information
  • Gift donor’s relationship to the borrower
  • Amount of the cash gift
  • Subject property address
  • A note stating that the cash given is a gift and there is no expectation for it to be paid back at any time
  • A note stating that the donor has no interest in the property’s sale
  • Signatures of the borrower and gift donor

Other documentation will also likely be required by the lender, including a paper trail that documents the transfer of funds into an escrow account, or from the donor’s bank account into yours. Both you and the gift donor will have to submit recent bank statements.

Any documentation showing how the funds were transferred will also need to be submitted. At no time should the transfer take place without proper documentation. If the gift donor had taken the gift money from another account – be it a savings account, investment, or even from the sale of a stock – there needs to be a paper trail showing where the money came from. 

After the gift money is deposited into your account, you should get a receipt for the deposit to complete the paper trail. 

The Gift Donor May Have to Pay Taxes on the Gift

Cash gifts for down payments will be taxed, and the person who gifts you the down payment will be liable for paying these taxes. For this reason, it’s important that the gift giver is fully aware of this fact and understands the tax implications that will be imposed.

Gift donors can give as much as $14,000 to anyone without incurring the gift tax from the IRS. If the person giving you this cash gift is married and files a joint tax return, the couple can jointly gift as much as $28,000 to a family member. Based on the same principle, a married couple can offer a cash gift to a married couple for a total of $56,000.

There are times when an agreement is made to have the borrower pay the taxes on the gift. Everyone’s tax situation is a unique one. Before you graciously accept a cash gift to be put rewards your down payment, make sure you discuss your scenario with a tax professional.

The Bottom Line

If you are fortunate enough to be getting a cash gift for your down payment, don’t forget to document it in detail for your lender. In addition, be sure that all parties understand the tax implications of such a gift and that the money is not intended to be repaid at any time. Speak with your mortgage specialist or real estate agent to have any questions you may have answered before you accept any down payment gift.