How Downpayment Gift Assistance Programs Work
Some mortgage products allow the buyers to use a cash gift for the down payment
Downpayment gift assistance programs help homebuyers cover downpayment and closing costs. Potential homebuyers who can make a house payment with no difficulty sometimes can't buy a house because they don't have the funds required for a downpayment and closing costs. Prospective buyers who don't have the funds to close on a home might consider using a down payment gift assistance program, sometimes called a down payment grant program.
Downpayment Gift Assistance Explained
Sellers are prohibited from giving homebuyers down payment funds, but gift assistance programs provide a "work around."
- The sellers enroll their house in a suitable program and contribute an amount equal to the assistance their buyer will receive at closing -- plus a fee, typically 0.75 percent of the home's sales price.
- When the transaction closes, the downpayment funds are wired from the gift assistance program to the closing agent. The seller has no part in the transfer of funds.
HUD and Gift Assistance Companies
Yes and no. Here's what HUD says about the programs:
- "HUD does not approve “gift” programs administered by charitable organizations and, thus, will not offer a formal approval of your program. Mortgage lenders are responsible for assuring that the gift to the homebuyer from the charitable organization meets the instructions described in HUD Handbook 4155.1 REV-4, CHG-1 Paragraph 2-10(C) (e.g., no repayment implied, etc.). Those charitable organizations that comply with existing regulations and policy guidelines are permitted to give cash gifts to eligible homebuyers and do not need prior FHA approval to do so."
So HUD does not issue formal approvals for gift programs -- it puts the burden on the lender to work with a legitimate program. The major programs all appear to comply with HUD requirements. Your lender can verify that the program you choose is acceptable.
Downpayment Gift Assistance Programs FAQ
Program specifics may differ, but they all offer the same basic services.
- Homebuyers must qualify for a loan that allows gift funds.
- There are no minimum or maximum income requirements for buyers, but there may be top limits set on the sales price of homes.
- Typical assistance seems to range from 1 to 7 percent.
- Funds can be used for the down payment and for closing costs.
- Gift funds can be used for new or existing homes.
- Unused funds must be returned to the gift program.
- Assistance programs cannot be used to refinance a house or to make home improvements.
- Sellers cannot use the gift as a charitable contribution, but it may be deductible as a selling expense. Talk to a tax professional.
Home sellers usually price their homes to include some room for negotiation. What matters to sellers is their bottom-line -- how much money they take away from the closing table. A buyer who has the funds to close may get a better deal on the house, while a buyer who needs help will pay closer to (or more than) the asking price, but in return can negotiate help from the seller.
This is what we refer to as a seller assist program. Usually the lender will allow a seller assist of up to 3% of the sales price. In a handful loans, that seller assist can be 6%. This means if you are buying a home worth $300,000, a seller assist of 3% could credit you with $9,000 to pay closing costs.
Closing costs are paid as a separate cost of the transaction and are not part of the purchase price.
One thing you must keep in mind is the home's appraisal value. The lender will not allow gift funds that result in a loan that exceeds the appraised value of the home. If you're working with a real estate agent, she can help you determine if the home is realistically priced and will appraise where it should.
Your lender can help you choose a downpayment assistance program and explain how your offer to purchase should be worded to ensure compliance with its underwriting guidelines.
Edited by Elizabeth Weintraub, Home Buying Expert. At the time of writing, Elizabeth Weintraub is a Broker-Associate at Lyon Real Estate in Sacramento, CA, CalBRE #00697006.