Are gift funds allowed when purchasing a second house?

3 Replies

I bought a house for $300K in cash 6 months ago that I want to use as a vacation house. My domestic partner gave me $60K as a "gift" and I am adding him to the title. I want to get a 30-year mortgage now and pull my cash out. Are gift funds allowed in this situation? If yes, can you please provide a link to Fannie Mae site where it says that it's allowed? Based on other posts, it might be allowed. 

I was able to find only this:

https://www.fanniemae.com/content/guide/selling/b2...

Delayed Financing Exception

If the source of funds used to acquire the property was an unsecured loan or a loan secured by an asset other than the subject property (such as a HELOC secured by another property), the settlement statement for the refinance transaction must reflect that all cash-out proceeds be used to pay off or pay down, as applicable, the loan used to purchase the property. Any payments on the balance remaining from the original loan must be included in the debt-to-income ratio calculation for the refinance transaction.

Note: Funds received as gifts and used to purchase the property may not be reimbursed with proceeds of the new mortgage loan.

However, per this: https://www.fanniemae.com/content/guide/selling/b3...

Gift Funds

A borrower of a mortgage loan secured by a principal residence or second home may use funds received as a personal gift from an acceptable donor. Gift funds may fund all or part of the down payment, closing costs, or financial reserves subject to the minimum borrower contribution requirements below. Gifts are not allowed on an investment property.

Can I have gift funds or not?

Thanks!

@Dina C.

Below is pulled directly from our guidelines. We are a conventional lender backed by Fannie Mae and Feeddie Mac, so at minimum we have to comply within their guidelines. Every lender has their own overlays above and beyond what their requirements are. Here is what are actual guidelines show; 

Use of Gift Funds

Gift funds are allowed on primary residence and second homes only. They are not allowed on investment properties.

Gift of Equity

Gift equity in the subject property is an acceptable source of down payment, as long as the amount of equity has been verified. The donor must provide a gift letter. 5% of the sales price must be verified as being saved by the borrower if the loan to value is over 80%; however, these funds do not have to be used toward the down payment. A gift of equity is allowed on a primary residence or second home purchase and not allowed on investment property purchase transactions.

DOWN PAYMENT

For a one-unit primary residence, (except for high-balance mortgage loans), a minimum borrower contribution from the borrower’s own funds is not required. All funds needed to complete the transaction can come from a gift.

For a 2-4 unit primary residence or second home with an LTV > 80% gift funds are allowed only after a minimum down payment of at least 5% has been made from the borrower's own funds.

Gift funds are not allowed on Investment property transactions.

So if you are claiming rental income, it is an investment property, not a second home. Also, delayed financing is prior to 6 months. If you are closing on the cash out, it will be after 6 months, which is a typical cash out refinance. Also you can only go up to a 75% LTV on a second home, based on appraised value.

Thanks Byron. The bank provides a "gift letter" to sign. There is no need to record it any other way. 

Thanks Jerry. This is very helpful. What are the benefits between a delayed financing vs. cash out? 

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