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This past month two of our clients received “Gift Funds” from Mom and Dad to help them with the down payment on their new home. There are lending guidelines for “Gift Funds” and it’s important to understand how they work in the event you are the giftor or the giftee.

Here’s what you need to know:

On a conventional loan up to $417,000 (Fannie, Freddie product), if the Gift Funds from mom and dad are less than 20% of the purchase price the borrower (son or daughter) must have 5% of their own funds. As an example: $250,000 Purchase price of the home$ 25,000 10% - gift from mom and dad$ 12,500 5% - required borrower contribution from their own funds

In this example, if the Gift Funds were $50,000 (20% of purchase price) then the borrower would not be required to contribute any of their own funds.

FHA loans do not have a minimum contribution requirement amount from the borrower regardless of the gift amount.

The reason I bring this to your attention is often times mom and dad will liquidate investments thinking their generous gift of 10-15% of the sales price will be plenty of money to help their son or daughter buy a home. Then they find out about the 5% funds rule which their children don’t have, then they get upset because they liquidated funds, possibly paid capital gains and the home purchase doesn’t happen.

There’s also some paperwork to be completed. Mom and/or Dad will be required to sign a one page Gift Letter which states your relationship, the amount of the gift and from what account the funds will come from. We will also ask them for the most recent statement for the the account in which the gift funds will come from. All standard procedure, and necessary to comply with underwriting guidelines.