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How Does Using a Down Payment Gift Work?

By Mike in Home Buying Tips with 0 Comments

After years of strong sales and price appreciation, prospective buyers of condos for sale in downtown San Diego are beginning to see signs of price stabilization. Significant discounts have been spotted in the North Park and Bankers Hill districts, which suggests lower selling prices could trickle south to the downtown condo towers and lofts in the near future. Taking advantage of lower prices means being able to lock down financing quickly, and a good strategy in this regard would be to convert gifted funds into a down payment. Mortgage lenders generally prefer that borrowers provide their own money for down payments, but underwriters have certain processes to account for gifting.

How Much of a Down Payment Can Be Gifted

Conventional mortgage products with the lowest interest rates require you to provide 20 percent of the down payment. There’s no limit on additional down payments coming from gifts, but the initial 20 percent has to be strictly yours. With non-conventional loans, including those guaranteed by the VA or FHA, the entire down payment can be funded through gifts.

How Verification of Funds Works

Current underwriting practices call for strict verification of funds. Mortgage lenders have a duty to verify not only how much money borrowers have but also where it comes from, and the reasons for doing so come down to legislative intent and the regulatory climate. The rationale for verifying where money comes from is largely based on preventing money laundering and monitoring foreign assets. In prosperous condo markets such as downtown San Diego, the scrutiny tends to be closer because there’s a history of foreign buyers snapping up units with suitcases full of cash. Gifted funds will need to be verified, particularly if the lender perceives them as being large deposits.

How Clean Deposits Are Determined

One of the first steps in the underwriting process is to run the names of all parties involved in the application through the Office of Foreign Assets Control (OFAC) database, which is managed by the United States Treasury Department, and this includes loan applicants as well as financial benefactors who are gifting funds. Once this step has been cleared, the next would be to establish a paper trail to determine the clean provenance of the funds, which must appear as bank deposits and be accompanied by a letter.

How Writing a Down Payment Gift Letter Works

You’ll know you’re working with a sharp mortgage loan officer when he or she offers to help you write the down payment gift letter. While there’s no official template for this document, it’s required for all mortgage transactions involving gifts. In essence, the letter must clearly state your name and the names of the parties presenting you with monetary gifts. These names will be run through the OFAC. Aside from donor names and addresses, the letter should list all gifted amounts, your relationship to the donors, the banks the funds are being transferred from or deposited into, and the assertion that the money isn’t a loan—this last point is of extreme importance to the underwriters. Fannie Mae, Freddie Mac, FHA, and VA mortgages will also need a signed statement from donors certifying their gifts aren’t to be repaid.

When you’re looking for the best ways to finance your new home purchase, make sure to seek guidance from a real estate agent with expertise in the intricacies of financing downtown San Diego real estate. With years of experience to draw upon, the trustworthy professionals at 92101 Urban Living can offer you savvy advice about every aspect of the home-buying process. Give one of our friendly agents a call today at 619-649-0368.