Congratulations on taking the exciting step of becoming a new homebuyer! As you embark on this journey, you will likely encounter unfamiliar financial terms and processes. In this blog post, we will demystify the concept of gift funds, explain how they work, and guide you through their utilization with FNMA (Fannie Mae) loans. By the end of this article, you’ll better understand how to navigate using gift funds toward your purchase.
What Are Gift Funds?
Gift funds, in the context of real estate, are funds provided by family members, friends, or other interested parties to assist you with your down payment or closing costs when purchasing a home. These funds are not loans and do not need to be repaid. They can be a significant help to homebuyers (especially first-time homebuyers) who may not have substantial savings.
How Do Gift Funds Work?
- Source Verification: When using gift funds, it’s crucial to ensure they come from an acceptable source. Fannie Mae has specific guidelines regarding the source of gift funds. Generally, these funds should come from a family member, a close friend, or a charitable organization.
- Gift Letter: To document the use of gift funds, you’ll need to provide a signed gift letter to your mortgage lender (don’t worry, we have a template we can provide for easy completion with e-signatures). This letter will include specific details, such as the giver’s name, relationship to you, the gift amount, the property address, and a statement confirming that the funds are a gift and not a loan. Both you and the donor will need to sign this letter.
- Paper Trail: It’s vital to keep a clear paper trail to ensure transparency and compliance with regulations. This means documenting the transfer of funds from the giver’s account to your account, providing copies of bank statements, and keeping all relevant financial records.
- Process: When receiving gift funds, we recommend having the gift funds sent directly to the escrow account once you have an accepted offer. This route helps minimize the necessary documentation. If funds are deposited directly into your account, we are often required to provide documentation to source the transfer from the donor’s account to your own, in addition to your own statement and gift letter.
Gift Funds and FNMA Loans
One of the most commonly utilized loan programs for homebuyers is through the Federal National Mortgage Association (FNMA), often referred to as Fannie Mae, which is a government-sponsored entity that plays a significant role in the U.S. housing market. FNMA has specific guidelines for using gift funds:
- Minimum Contribution: Some loan programs require a minimum contribution of the borrower’s own funds toward the purchase. FNMA does not share this requirement if you are purchasing a 1-unit primary residence. For this scenario, Fannie Mae will allow for all of your funds for down payment and/or closing costs to come in the form of gift funds. If you are considering a multi-unit property, you are required to contribute 5% of your own funds. Gift funds are not permitted for investment properties.
- Debt-to-Income Ratio: FNMA loans have specific debt-to-income (DTI) ratio limits. Using gift funds can help lower your DTI ratio, making it easier to qualify for the loan.
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April 27, 2024
Who Can Give Funds for My Home Purchase?
Gift funds can come from various sources, but it’s essential to ensure that they are acceptable to your lender and meet the guidelines of Fannie Mae (FNMA). Generally, gifts can come from:
- A relative – such as a parent, spouse, child, or other dependent related by marriage, adoption, blood, or legal guardianship
- Non-relative – someone who shares a familial relationship, such as a domestic partner, former relative, godparent, or individual engaged to marry the borrower.
It’s crucial to discuss the source of gift funds with your lender early in the process to ensure compliance with their policies and FNMA/Fannie Mae guidelines.
Are There Limits to How Much I Can Receive in Gift Funds?
FNMA and Fannie Mae do not impose specific limits on the amount of gift funds you can receive. However, there are some essential considerations:
- Lender Policies: While there are no fixed limits set by FNMA, your lender may have its own policies regarding the maximum amount of gift funds they are willing to accept. These policies can vary from one lender to another, so it’s vital to discuss this with your lender upfront.
- Down Payment Requirements: Some loan programs may require a minimum borrower contribution, which means you must use some of your funds for the down payment. As mentioned above, FNMA loans may allow gifts to cover the entire down payment, but this can depend on the specific loan program and your financial situation.
Questions? Ask JVM Lending
At JVM Lending, we pride ourselves on being experts in understanding gift funds and navigating the intricacies of FNMA and Fannie Mae loans. Our dedicated team is here to guide you every step of the way, ensuring that you make informed decisions and secure the best mortgage options tailored to your unique situation.
Don’t let the complexities of real estate, mortgages and gift funds hold you back. Take action today and reach out to JVM Lending. Let us be your trusted partner on this exciting journey towards homeownership. Contact us now and make your homeownership dreams come true with gift funds!
