Coming up with the down payment required on some loans can be difficult. There are various ways to obtain the down payment money, one of which is known as "gift equity." Use the following as a guide to understanding what to expect when you plan to use gift equity as a down payment.
Work closely with your loan officer to know exactly what you are going to be expected to pay as a down payment at the time of closing. Mortgage loans usually always require a down payment in addition to closing costs. Many buyers strive to come up with at least 20 percent of the sales price of their prospective property in order to avoid paying PMI, pre-mortgage insurance.
Inform your loan officer early on in the processing of the loan if you know that you will be receiving a gift of equity to pay for all or a portion of your down payment. Make sure that all parties--the recipient of the gift equity and the donor of the gift equity--know and understand that this money is being used for the purpose of a down payment with no intent to be paid back.
Comply with the requirements of the loan officer and mortgage company. They will require a "gift letter" from the person or family member that is giving you the gift equity down payment. This letter will be required to include several things such as the name and address of the donor and the relationship of the donor to the recipient. In addition, they will require the letter states that the donor knows that no repayment is expected or required of the recipient for the gift equity relating to the property being purchased in this transaction. Most importantly, the letter must state the exact amount that is being gifted.
Keep very clear records of how the money being used as the gift equity was obtained, where it came from, whose account and the names on the accounts. There has to be a clear paper trail that can be verified by the underwriting departments of the mortgage company before approval to use this gift money or gift equity can be used. All of this is required along with the gift letter from the donor.
Give the donor of the gift equity ample time to complete their letter to the requirements of the mortgage company. Be sure to keep copies of the letter before passing the letter on to the loan officer to go through the processing and underwriting departments for final approval. This gift of equity will have to be approved as a part of the loan approval process. There will usually be a copy of this letter required at closing as well, as the title company will have to handle the accounting of all the funds for the closing and the disbursement of funds after the funding approval.
"Gift equity" is not a loan. This money is given to a prospective buyer by usually a family member as a gift for using as a down payment. It needs to be very clear to all parties that this money will not be repaid.