For first-time homebuyers, one of the biggest challenges to owning a new townhome, new single-family home, or condo for sale is coming up with the funds for a down payment. Depending on the type of mortgage loan secured, the down payment can range from 5 percent to 20 percent (the amount necessary to avoid mortgage insurance)—and the latter is often a steep proposition for hard-working millennials. Add in closing costs and other fees, and the process can be financially overwhelming.
To help bridge the shortfall, parents, grandparents, older siblings, and other relatives are chipping in by gifting funds to buyer. If this sounds like a novel idea, it’s actually more common than you might think. As this this Wall Street Journal article reports, more than one-fourth of all first-time buyers used gifted funds to complete their down payment in 2013. By comparison, in 1999, 22 percent of buyers received gifts, WSJ reports.
While the economic picture and interest rates are favorable for those interested in real estate for sale, it may take a little bit of help getting started. Parents and relatives of first-time buyers recognize the benefits of home ownership over renting, particularly since most mortgages are lower than monthly apartment rent. (Further, rental rates keep rising, and show no sign of slowing down any time soon.) There’s also the equity factor: Parents want their children to have ownership in something that will increase in value. This isn’t possible if they continue renting an apartment or house.
The Gift of Giving
While the amount that can be gifted to a buyer is unlimited, those who can actually provide the funds must be qualified, meaning, they must be a legitimate relative. Family friends, peers, co-workers, or generous individuals won’t qualify.
Most mortgage lenders accept gifted funds to a borrower for a new home, but each one has its own way of doing things, so your best bet is to ask questions up front. However, there is one steadfast across-the-board requirement, regardless of who the lender is: the gift letter. This is a letter that explicitly states that the funds are a gift and not a loan, and lists the name of the giver, receiver, the new home address, and more. To meet this requirement, some lenders provide a form that the borrower and giver must both fill out; others may require an actual written letter.
There are several different ways the funds can be gifted to the borrower.
- Direct: The giver can wire funds directly to the title company or the recipient’s account. The gift letter and documentation will be required, such as a copy of the donor’s check and the borrower’s deposit slip. A settlement statement that shows donor’s check is also acceptable.
- Cashier’s Check: Funds can be given in the form of a cashier’s check. This option requires the gift letter and proof of the source of the funds. There must be bank verification that the money was taken from the donor’s account. The giver’s bank statement can also be used.
- Check: Proof of the gift can also be shown with a gift letter and a cancelled check from the gifter to the buyer. The buyer must also show that the funds are in his or her account.
For any of the above options, always check with the lender to inquire about its specifics for donating funds. It is also recommended that the gifter speak with his or her accountant to inquire about any tax-related factors.
First-time home buyers looking to purchase a single family home for sale, new condo, or new townhome are in the advantaged position because real estate fundamentals across the nation are strong. Houston is the leader for new housing construction, and the flurry of development activity means there are many opportunities to buy homes in the city—a reality that a growing number of people can’t wait to experience.
