It’s no secret that the cost of real estate in San Francisco is high. Many first-time home buyers are turning to family—specifically, to their parents—for a little extra help. If you’re considering making a purchase that will partially rely on what are called “gift funds,” here’s what you need to know, courtesy of my colleague Gordon Friedman of Mortgage Service Professionals:
– The funds must be for a primary residence or second home (not for an investment property)
– The gift must be from a parent, relative, domestic partner, spouse or fiance
– A gift letter is required, which must state the gift amount, property address, date given/to be given, and donor address. The letter also must state that no repayment will be required
– Buyer must have 20% or more in down payment, though the entire down payment can be a gift
– If the buyer has less than 20% down, there will be a 5% borrower contribution required
– For a jumbo loan (more than $625,500), a 5% borrower contribution is required regardless of the down payment.
Parents may co-sign to help their child qualify for financing. Their role in the transaction is as a “non-occupant co-borrower.” They will be on the loan and title, but will not live in the property. Here are the ground rules:
– Parents’ income is combined with son or daughter (and spouse if married) for qualification
– Parents’ debts must be considered
– A loan will only be available from lenders that underwrite to Freddie Mac conforming loan guidelines (not Fannie Mae)
– There’s limited availability among jumbo lenders
– Parents’ contribution towards down payment is not a gift since they will be on the loan
If you’ll be using gift money in your purchase, it’s important to let your lender know during the preapproval stage so there are no surprises.