Using stimulus payments to fund a home
Q: My wife and I have four older brothers and sisters. Each received $1,400 tax-free from the government in April because of President Biden’s COVID-19 relief bill. They, along with our parents, have gotten together and are willing to give us the money to help us buy a first home. That’s six checks. Will lenders allow this?
A: This is a very nice gesture and shows how family members can help one another. Six checks at $1,400 each total $8,400. If you buy with 3 percent down through the HomeReady (Fannie Mae) or Home Possible (Freddie Mac) programs you can borrow $280,000 if otherwise qualified. You could also do well through the FHA (3.5% down if your credit score is 580 or above) and the VA (0% down).
Lenders are very concerned that down payment money is well documented and comes directly from borrowers. The big exception is that they allow gifts. Program rules vary, but generally funds from family members are fine and money from friends, employers, labor unions, and nonprofit groups may also be allowed. For specifics, speak with a loan officer.
What lenders do not want are hidden loans, financing not disclosed to them.
Hidden loans represent several problems.
First, they mean the borrower has more debt and higher repayment costs than loan applications show. That is a huge no-no. It means debt-to-income (DTI) calculations can be wrong and that can create a liability for the lender when the financing is sold or guaranteed.
Second, if you cannot save enough for a down payment there are options to help you. Gifts are one possibility but not everyone can get a financial gift. An alternative is to get help from a down-payment assistance program. DownPaymentResource.com tracks several thousand assistance programs, and you can search the site by ZIP code.
Third, lenders want to protect borrowers against future claims. To do this they will require donors to provide a gift letter. This letter typically lists the amount, the source of the funds (the bank account), your relationship with the donor, the purpose of the gift (typically showing the address of the property being purchased) and a plain statement saying the money is a gift and that no repayment or interest is required.
Fourth, some potential gift sources are not allowed. Gifts from sellers, real estate professionals, lenders, loan officers, builders or anyone involved in the transaction are banned.
Fifth, and importantly, buying a home requires more than a down payment. You also need money for closing, moving, fixing up, etc. Speak with your real estate broker to estimate local closing costs and other expenses.
The bottom line: Documented gifts from allowable donors are welcomed by lenders. Your loan officer can explain documentation and other requirements for your particular loan.
The rules for lenders are one thing, the rules for gifts and taxes may be another. In general, gifts in 2021 of not more than $15,000 from individual donors are tax-exempt. As always, speak with a tax professional for specifics.