Down Payment Assistance Programs

Buying a Condo with FHA Financing

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FHA loans and condos are often the two things first-time homebuyers want. But do they go hand-in-hand? Even if you aren’t a first-time homebuyer, can you buy a condo with FHA financing?

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The short answer is ‘yes,’ you can buy a condo with FHA financing. The longer answer is that you can buy a condo with an FHA loan, but you have to follow the strict requirements set by the FHA. Any loan program has stricter requirements when it comes to condos because they are ‘riskier’ than a single-family home.

Keep reading to learn what you need to secure FHA financing on a condo.

The Condo Must Have FHA Approval

Perhaps the largest hurdle to jump when buying a condo is getting FHA approval. This goes beyond what the lender will allow. The FHA must say that it’s okay for FHA borrowers to use FHA financing to buy a condo in that development.

Here’s what it takes for the FHA to approve a condo development:

  • No more than 25% of the units in the development may be for commercial purposes
  • One person (investor) cannot own more than 10% of the units
  • A majority (85%) of homeowners in the development must be on time with their HOA dues
  • At least half of the units must be primary residences
  • The FHA must approve the association’s budget and financial status
  • The association must not be involved in any litigation or have any pending litigation against them
  • The development must have adequate property insurance

These are the FHA requirements in a nutshell. They look at each development on a case-by-case basis. Because when you buy a condo you buy more than your own unit, you buy into shared property with the other owners, the FHA needs to make sure the association has things under control. They need to know that one person doesn’t own a majority of the units or that the units aren’t mostly rented out or used as condotels.

The Easiest Way to Buy a Condo With FHA Financing

Do you want the easiest way to purchase a condo if you are an FHA borrower? Find a development that the FHA already approved. There are plenty of them throughout the United States. This way you cut down on the red tape and the time it takes to get to the closing.

HUD offers a list of FHA-approved condos on their website. You can make your search as narrow or as broad as you like. For example, you can search by ‘all states,’ but you can probably narrow your search down to at least the state you want to live, or even as narrow as a specific county. If you found a particular development you are interested in already, you can also search by condo name.

Your real estate agent can also be a valuable resource when helping you find an FHA-approved condo. Use a realtor that is familiar with using FHA financing on a condo for the best results. Real estate agents have early access to MLS listings, which the realtor can tell if the development has FHA approval or not.

Buying an Unapproved Condo

If you happen to fall in love with a condo that doesn’t have FHA approval yet, you are in for a longer ride. The development must get FHA approval in order for you to move forward with your financing. Keep in mind that the association isn’t obligated to request FHA approval – it’s up to the directors if they want to go through the approval process or not.

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The condo development’s status will determine how long the process will take. If you happen to find a development that was once FHA approved, but has since let the approval expire (they have to keep renewing their approval), you may get by with a streamlined approval process if the approval expired within the last six months.

If the development’s approval expired more than six months ago or they never had approval, they must go through the process from scratch. This means proving all of the factors we stated above plus resolving any other issues that come up during the approval process. It can take as long as 4 – 6 weeks to get FHA approval.

Securing FHA Financing for Your Condo

The good news is, though, that the qualifications to get FHA financing for a condo are the same as if you were buying a single-family property. You need a 580 credit score, 31% maximum housing ratio, 41% maximum total debt ratio, and a 3.5% down payment.

Some lenders may require a few compensating factors to make up for the risk of default that a condo poses, but that’s not always the case. Lenders have to follow the FHA rules and then can add their own requirements on top of that – they call it a lender overlay. If you come across a lender that is especially tough on borrowers buying a condo, keep shopping around with other FHA lenders to find one that doesn’t have the overlays.

Buying a condo with FHA financing is not impossible, but it definitely requires a little more work. Finding a condo development that the FHA already approved is certainly the easiest way to go about it, but you can always request approval to see how the process goes for you.

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Should you Refinance to Remove Mortgage Insurance?

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If you put less than 20% down on your home when you bought it, you probably pay Private Mortgage Insurance as a part of your mortgage payment. If you took an FHA loan, no matter how much money you put down, you must pay mortgage insurance each month.

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You may wonder if it makes sense to refinance your loan to get out of the PMI if you have the chance. In some cases, it may make sense, but certain factors have to fall into place. Keep reading to learn if it’s right for you.

What Will it Cost?

Your first consideration should be the cost. You can’t refinance for free. So what will it cost? Do you have the money available to pay the closing costs or will you wrap the costs into your loan? This will make a difference in what you should do.

If you have the money to pay upfront, you can keep your mortgage payment down and enjoy the PMI free loan, assuming you have at least 20% equity in the home. If you wrap the costs into your loan, you increase the principal balance of your loan. This makes your payment higher. While you still might avoid PMI, you just made your loan balance higher, which means it will take longer to own the home free and clear.

What’s Your Break-Even Point?

Putting the cost aside for a second, it’s time to figure out your break-even point. It’s not enough to assume that you’ll save because you won’t pay PMI anymore. You need to know when you will start realizing those savings. This goes back to the closing costs. How long will it take you to pay back the closing costs based on the savings you’ll earn?

Here’s a quick formula that you can use:

Total closing costs/Monthly savings on new loan = Months to break even

Just how long is a ‘good amount of time’ depends on your circumstances. Typically, a break-even point of three years or less is feasible. But, that’s only if you are going to stay in it longer than three years. Let’s say that your break-even point is 3 years and you are going to move in 4 years. Does it make sense to fork over the money for closing costs just to save a little money over the course of one year? It probably doesn’t make sense.

On the other hand, if you plan to stay in the home for the foreseeable future and it will only take 3 years to pay off the closing costs, then it may make sense to do so. You have to know that break-even point as well as your plans to figure out what’s right for you.

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Can You Get the PMI AutomaticallyRemoved?

If you have a conventional loan, you should know about a little rule that conventional loans have. You are able to request that the lender remove your PMI once you owe less than 80% of the home’s value. This could be the home’s original value or the current value, if it increased. You may have to pay for an appraisal to prove the higher value of your home, but that costs peanuts compared to a full-blown refinance.

If you know that you owe less than 80% of the home’s value, you can request removal of the PMI in writing. The lender will then evaluate the situation to determine if you do in fact ow less than 80% of the home’s value.

Here’s another fun fact, though. If you don’t request that the lender remove the PMI when you owe less than 80% of the home’s value, the lender has to remove it once you owe 78% of the home’s value. It’s an automatic removal. You don’t have to request the removal in writing or prove anything. The lender must remove it on their own.

If you are close to this point, it may not make sense to pay to refinance since you can get the PMI removed free of charge. If you are happy with your current loan’s term and interest rate, it may be better to just leave the loan alone and let the PMI fall off on its own.

As you can see, every borrower has a different situation. It’s up to you to figure out which option works the best. Weigh the pros and cons of each situation to help you decide which option will leave you with the best results.

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Pros and Cons of a Small Down Payment on a House

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Did you know that you don’t have to put 20% down on a home to get financing? Today many programs allow down payments as low as 3% and there are even programs that don’t require a down payment at all.

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While this sounds ideal, it may not be the best for everyone. Keep reading to learn the pros and cons of making a small down payment on a home.

The Benefits of a Small Down Payment

First, we’ll start with the benefits of a small down payment.

  • You’ll have money in reserves. It’s always a good idea to have money in an emergency fund when you own a home. What if something breaks as soon as you move in or you realize that you need to buy a specific appliance? If you don’t have the funds, it can put you in a dire financial situation right away. Instead, you can have the money sitting in your savings account for that rainy day.
  • Makes it easier to buy a home – If you can find a loan program, such as the FHA or even a conventional loan that requires a low down payment, you may be able to buy a home sooner than you thought. If you are forced to wait until you have a 20% down payment, on the other hand, it can take longer.
  • You increase your rate of return – When you put less down on the home, but your home appreciates, you are able to earn a higher rate of return. The more money you put into the home, the less you make in equity; you are just making back what you put into the home.

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The Downsides of a Small Down Payment

Of course, there are downsides to a small down payment.

  • You’ll have little equity – If you ever want to access the home’s equity to make improvements to the home or even pay for another large expense, you won’t’ have any for quite a while. Gaining equity in the home with a small down payment can take many years.
  • You’ll pay mortgage insurance – Whether you opt for a conventional loan or a government-backed loan, you will pay mortgage insurance on the loan. If you take an FHA or USDA loan, you will pay mortgage insurance for the life of the loan. Conventional loans only require it until you owe less than 80% of the home’s value.
  • You’ll pay a higher interest rate and have a higher payment – The less money you put down on a home upfront, the more your payment will cost you. Lenders typically charge higher interest rates because of the higher risk of default. Your payment will then be higher but even with the same interest rate, your payment will be higher because of the higher amount of your principal balance.
  • It’s tougher to win the bid on the home – If you are trying to buy a home in a competitive market, sellers may favor the buyers that put more money down on the home. A higher down payment often means an easier time getting financing, which is what the seller wants as they don’t want to lose the offer that they accept.

It’s a Personal Decision

Each situation is different when it comes to making a down payment. Sometimes a large down payment is good, especially if you will stay in the home for the long-term and you have reserves set aside on top of the down payment. If you aren’t sure about your longevity in the home or you worry about your financing future, though, making the smaller down payment may be the better option.

You have to weight the pros and cons of each side. It helps if you talk to a few lenders and even your tax advisor to see which option will suit you the most in the long run. It’s not an easy decision to make and it’s not a decision you should rush into. Instead, take your time and decide which option is right for you.

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How to Buy a Home without a 20% Down Payment

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Did you know that you don’t need 20% down on a home to get a mortgage? It’s just one of those myths that have stuck around through the years. Today there are loans that allow much lower down payments and a few that don’t even require a down payment!

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Keep reading to learn the steps you should take to buy a home with less than 20% down on it.

Ask Yourself the Following Questions

Are you a veteran?

This is the first one. If you are and you served at least 90 days during wartime; 181 days during peacetime, or 6 years in the National Guard/Reserves you may be eligible for a VA loan. What’s so special about the VA loan? For starters, you don’t need a down payment. The VA allows lenders to give you a 100% loan and they don’t charge mortgage insurance!

If you are a veteran with enough time served and you have an honorable discharge, check with the VA to see if you have home loan entitlement. If you do, you may have a 100% loan waiting for you!

Do you live in a rural area? Do you make less than the average for the area?

These questions are a little trickier. If you live in a rural area, as determined by the USDA, and you make less than 115% of the average income for the area, you may qualify for a USDA loan. This is another government-backed loan. With the USDA loan, you don’t have to make a down payment – you can get 100% financing.

The eligibility for the USDA loan works a little differently, though. The USDA wants to know your total household income – not just the income of you and your co-borrower. They want to know the total household income because they know that multiple generations often live together and contribute to the household bills. The USDA loan is for low to moderate-income families. If your total household income is higher than 115% of the area’s median income, you wouldn’t be eligible.

The USDA does provide a few allowances though. For example, people with children living with them can deduct $480 from the total household income. This includes children under the age of 18 and over the age of 18 that are in school full-time. You can also deduct $480 for any disabled relatives living with you or $400 for any seniors living with you.

If you are eligible for the USDA loan, you can get 100% financing. You will pay an upfront mortgage insurance fee as well as annual mortgage insurance, paid monthly, so it’s a little different from the VA loan, but you still get 100% financing.

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If you don’t qualify for either of these, move onto the next step.

Qualifying for the FHA Loan

Your next step is to see if you qualify for the FHA loan. This loan allows just 3.5% down on the home and you don’t have to have excellent credit. In fact, the 3.5% down payment doesn’t even have to come from your own income – it can be a gift from a family member or employer.

FHA loans require a credit score of 580 and a maximum debt ratio of 31% on the front-end and 41% on the back-end. These are flexible guidelines, especially with the low down payment required. You can secure FHA financing only for a primary residence, though. The loan program is not for use on a second home or investment home.

FHA loans do charge mortgage insurance. In fact, you’ll pay it twice. The first time is at the closing – you’ll pay 1.75% of the loan amount. Next, you’ll pay it monthly in your mortgage payment. The lender will figure out the mortgage insurance which equals 0.85% of your loan amount and divvies it up amongst your 12 monthly payments.

Trying the Conventional Loan

Your final option for a low down payment loan is the conventional loan. This is the loan that most people think you need 20% down on. While you do need 20% down if you don’t want to pay PMI, you can get by with a down payment as low as 5% and still get the loan.

The difference with the conventional loan is that you need great credit and low debt ratios. The conventional loan requires at least a 680 credit score, a maximum 28% housing ratio and a maximum 36% total debt ratio.

If you qualify, you’ll pay PMI on the loan for as long as you owe more than 80% of the home’s value. Unlike any of the government-backed loans, once you owe less than 80% of the home’s value, you can cancel the PMI and keep the same loan.

There are many options for you to get a loan even if you don’t have a 20% down payment. Go through the options to see which one will suit you the best, and then look for a suitable lender. You may want to get quotes from a few lenders to see who offers the best interest rates and closing costs for your situation.

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How Much do You Really Need to Buy a House?

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You know you want to buy a house, congratulations! Now comes the hard part – saving money for the house. You know there are different loan programs out there, so just how much money do you need?

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We will help you understand the different requirements below.

Difference Between the Down Payment and Closing Costs

First, know that the down payment isn’t the only thing you need to think about when buying a house. You also have to pay closing costs. These are separate from the down payment. The closing costs can add up to as much as 3% – 5% of the loan amount.

Here’s an example. If you plan to put down 20% on a $200,000 home, you would need $40,000 just for the down payment. You would then need between an additional $6,000 to $10,000 for the closing costs. This means anywhere from $46,000 to $50,000 to close on the loan.

Do You Need a 20% Down Payment?

Now here’s the real kicker – you don’t need a 20% down payment. Many people believe this is the only way to get a loan, but it’s not. You can put down as little as 3.5% in some cases. In fact, some loans even allow you to get away with no down payment; you just pay the closing costs! So how do you know how much you need? It depends on the type of loan program you choose.

Conventional Loans

Conventional loans carry the stigma that you need a 20% down payment, but that’s not the case. Yes, you need 20% down if you don’t want to pay Private Mortgage Insurance, but you can still get conventional financing without that large down payment.

You’ll find conventional lenders that allow you to put down as little as 5% on the loan. This does mean you will have to pay PMI until you owe less than 80% of the home’s value, but it gives you the chance to get conventional financing with its low-interest rates and attractive terms.

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FHA Loans

If you don’t qualify for conventional financing because your credit score is too low or your debt ratio is too high, you may want to consider an FHA loan. With FHA loans, you only need a 3.5% down payment. The FHA allows lenders to provide you with 97.5% financing.

In exchange for the large loan amount, you’ll pay an upfront mortgage insurance fee as well as an annual mortgage insurance fee. The annual MIP is added to your mortgage payment each month. You pay 1/12th of the annual amount each month. FHA loans don’t offer the option to eliminate MIP after you owe less than 80% of the home’s value, though. You pay the MIP for the life of the loan, so keep that in mind.

VA Loans

If you are a veteran of the military, Reserves, or National Guard, you may not need a down payment on your home. If you are eligible for VA financing and qualify, you can borrow 100% of the home’s purchase price. VA loans only charge an upfront funding fee in exchange for offering this loan to you; they don’t make you pay for mortgage insurance.

It’s important to remember that even with a 0% down payment loan, like the VA loan, you’ll still need the money to pay the closing costs. Lenders will verify these funds just as they would if you were to put money down on the home.

USDA Loans

USDA loans are another government loan program that provides 100% financing on your home. The catch with USDA loans is that you must be a low to middle-income family in order to qualify. You also must buy a home in a ‘rural’ area. The USDA has loose guidelines regarding what is rural, so you may be surprised to find the areas that you can live and still get 100% financing. USDA loans do charge upfront and annual mortgage insurance, though, just like FHA loans do.

So how much money you should save to buy a house depends on your situation. Obviously, the more you save, the lower your mortgage payment will be. It’s also the less interest you will pay over the life of the loan. If you don’t have money to put down on the home and cover the closing costs, you may want to consider a government-backed loan, such as the USDA or FHA loan to help keep your costs down as low as possible.

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Best Ways to Finance Home Improvements

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You want to renovate your home, but find yourself without the cash to do so right now. While you might be able to obtain a personal, unsecured loan, the interest rates on it might be higher than what you want to pay. Another option is a home renovation loan. You have several options when you already own the home. Lenders may offer you a home equity line of credit, a home equity loan, or a cash-out refinance.

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No matter which loan you choose, you’ll pay interest. How much interest you pay does depend on the loan, though.

Home Equity Line of Credit

The HELOC, or home equity line of credit, usually has the lowest interest rate. Don’t fall for this loan just yet, though. Yes, you do get a low introductory rate, but the rate is variable. In other words, it could change from month to month. There’s no way to predict your rate either.

The good thing about the HELOC is you only pay interest on the funds you use. Let’s say you take out a $50,000 HELOC, but you only draw $10,000 of the funds right away. You would then only pay interest on that $10,000. If you leave the remaining $40,000 untouched for the remainder of the term, you’ll never pay interest on those funds.

Home Equity Loan

The home equity loan works a little differently. With this loan, you don’t get to draw funds as you need them. Instead, you receive the funds as one lump sum. You can put the funds in a savings account or some other safe place to use them as you need.

Because you draw all of the funds at once, though, you start paying interest immediately on the full amount. The interest rate charged on this loan is usually slightly higher than the HELOC too. But, your chances of securing a fixed-rate are much higher on this loan. So you may pay a little more interest upfront, but you never have to worry about the rate changing.

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Cash-Out Refinance

Your final option is the cash-out refinance. With this loan, you refinance your first mortgage and take out a larger amount. Let’s say you owe $150,000 on your current mortgage, but your house is worth $300,000. You may be able to take out up to 80% of the home’s value with the cash-out refinance. In this case, that means an additional $90,000 for your home renovations.

Lenders take a risk when they give you a larger loan than your outstanding first mortgage. Because of this, the interest rate on the cash-out refinance is usually the highest amongst the three choices. This doesn’t make it the worst choice, but it does mean it will cost you more to keep this loan, especially if you take a 30-year term. The longer you borrow the money, the more interest you will pay on it over the life of the loan.

So do home renovation loans carry higher interest rates? It depends on the chosen loan as well as your qualifying factors. Just like any other loan, lenders base your interest rate on the risk you pose. If you have borderline credit scores and high debt ratios, you may end up paying higher interest rates. If, on the other hand, you have great credit and low debt ratios, lenders may give you access to lower interest rates even on a home renovation loan.

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When is Private Mortgage Insurance Required?

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Private Mortgage Insurance, or PMI, is an insurance that protects conventional lenders. In other words, if you take out a Fannie Mae or Freddie Mac loan, you may pay this insurance. It only applies to borrowers that put less than 20% down on their home, though.

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If you qualify for conventional financing with a down payment less than 20%, you’ll pay PMI, which is a percentage of your loan amount. The exact amount you pay depends on your credit score and your loan-to-value ratio.

Typically, the less money you put down, the more insurance you will pay. The same is true with your credit score. The lower your credit score is, the more insurance you will have to pay.

What is Private Mortgage Insurance?

PMI or Private Mortgage Insurance is a policy that covers the lender – not you. So even though you pay the premiums, it’s insurance to protect the lender. Because the lender takes a risk giving you a mortgage with less than a 20% down payment, the insurance is required. This gives the lender a little relief should you default on the loan.

How Much is PMI?

As we stated above, the amount you pay will vary. On average, though, borrowers pay 0.3% to 1.5% of their loan amount annually. The lender will charge you 1/12th of the annual amount with each mortgage payment. This figure gets included in your debt ratio to help lenders determine if you still qualify for the loan.

Can You Cancel PMI?

There are several ways you can get out of paying PMI. At the onset of the loan, though, there is no way around it. If you put less than 20% down on a conventional loan, you must pay the insurance.

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Moving forward, though, you may be able to get out of paying the insurance for the long-term using one of the following methods:

  • Pay your principal down faster. If you make just the minimum mortgage payments required, you will stick to the standard PMI schedule as it shows on your amortization schedule. If you make extra payments towards the principal, though, you may knock the principal down faster. This means you’ll hit 80% LTV faster, which means quicker elimination of the PMI.
  • Keep track of your home’s appreciation. If you notice homes in the area are selling for more than what you thought your home’s value was, consult with a professional. An appraiser will be able to tell you if your home appreciated enough to help you eliminate PMI. If it did, you can pay for a professional appraisal and petition the lender for the elimination of the PMI.
  • Make home improvements that increase your home’s value. If you plan to renovate your home, make improvements that will increase your home’s value. If it increases enough and you pay the principal down far enough, you may see 80% LTV sooner rather than later, allowing you to remove PMI.

PMI is Different than FHA MIP

Don’t confuse conventional Private Mortgage Insurance with the FHA’s Mortgage Insurance Premium. The FHA insurance is government-backed and required for the life of the loan on every FHA loan. With the FHA loan, it doesn’t matter how much you put down on the home. The minimum requirement is 3.5% of the home’s purchase price. If you put down more, it doesn’t help your MIP. You pay the same amount as every other FHA borrower, which right now equals 0.85% of your loan amount.

The only way to get out of FHA MIP is to refinance the loan into a conventional loan. If you do this, though, it’s best to wait until you owe less than 80% of the home’s value. This way you won’t be stuck paying PMI too and you can start fresh on your conventional loan.

PMI does offer some benefits, even though it’s another charge on your mortgage payment. Without PMI, you might not be able to get a conventional loan with less than 20% down on a home. This makes the guidelines a little more flexible and conventional loan programs more accommodating.

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What’s the Difference Between Owner’s and Lender’s Title Insurance?

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When you buy a home, you have to take out title insurance, or at least you do if you borrow money to buy the home. Lenders require a policy that covers their interests in the property should someone try to stake a claim to the property after you close on it. Did you know that there’s also an owner’s title insurance policy? Lenders don’t require this insurance, but it’s highly recommended for all buyers, even those that pay cash for the home.

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What is Title Insurance?

When you buy a home, a title company runs a search on the home’s records. They look as far back as they can to determine that the home legally changed hands as many times as it did. They also look for any outstanding liens on the home that don’t pertain to the mortgage.

After the title search, the title company will issue title insurance. The insurance covers either the lender or the owner against any defects in the title that may have been missed. Both lender and owner’s title insurance have a one-time premium that you pay at the closing.

What is Lender’s Title Insurance?

Lender’s title insurance, as the name suggests, protects the lender. You must pay for this premium at the closing. It doesn’t benefit you in any way; it only covers the lender up to the amount of the mortgage. This way if someone comes in and stakes claim on the home after you bought it, the lender has insurance coverage to cover legal fees and any potential losses.

Lenders title insurance stays in effect for the entire loan term. If you sell the house or refinance the loan, the current lender’s title insurance becomes null and void. You’ll have to purchase new title insurance for the new lender.

What is Owner’s Title Insurance?

You can buy owner’s title insurance for the amount you paid for the home. The owner’s policy protects you against lawsuits or other issues that affect your homeownership. Some of the most common issues include:

  • Errors in the deed
  • Mistakes in recording
  • Chain of title issues
  • Fraud or forgery
  • Undisclosed heirs

If there is a lawsuit regarding homeownership, you are the first target, which is why securing an owner’s policy is crucial. It will protect you financially from a lawsuit as well as help you cover the legal fees.

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Are Both Lenders and Owner’s Policies Required?

Only lender’s title insurance is a requirement if you take out a loan. if you pay cash, you don’t have to take out any title insurance. However, owner’s title insurance is highly recommended whether you have a mortgage or not.

The owner’s policy protects your investment in the home. This is especially important for cash buyers. If there is a large claim against the property and you lose all of your equity, you essentially lose your entire investment in the home.

Who Pays for Lender’s and Owner’s Insurance?

Each state and title companies within the state have different rules, however, in general, buyers pay the lender’s insurance policy and sellers pay the owner’s policy. Of course, buyers can pay for both policies and buyers can get seller assistance with a majority of their closing costs, essentially passing the buck to the seller.

Does Title Insurance Protect Against Liens?

Both owner’s and lender’s title insurance protect against liens. If the lien affects you financially or affects the home’s value, the insurance will protect you. For example, if there’s an unpaid tax lien on the home, the insurance would cover the financial aspect of the lien if the lien existed prior to the title search and was somehow missed.

Both lender’s and owner’s title insurance are important. They protect both the lender’s and your own interest in the property. Even the most thorough title search could miss something that may cause ownership or financial issue down the road.

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What are the Down Payment Gift Tax Consequences?

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The down payment is often the hardest part of the home buying process. It’s often the reason people continue to rent, rather than buy a property, because they don’t have enough money to put down on the home.

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Fortunately, many programs allow the use of gift funds. In other words, a family member, close friend, or employer may gift you money to put down on your home. Many people wonder about the tax implications of doing this. Does it affect you, the donor, or neither?

Accepting Gift Funds

As the recipient of gift funds, you’re off the hook when it comes to the IRS. They don’t tax the money because the donor already paid taxes on it. The money is a gift, not money you earned for doing something.

Of course, this must be documented so that the IRS knows it is a gift. Fortunately, lenders require this too. The donor must write a letter that states the money is a gift, the reason for the gift, and the amount provided. As long as the donor puts a statement in the letter that this money is a gift, you don’t have to worry about the taxes on your end.

Giving the Gift Funds

The donor may or may not have tax implications for giving you money. It depends on the circumstances. The important thing to know is that the donor probably won’t have to pay taxes this year or the year they gift you the money. Here’s why.

Each person has a lifetime amount they can gift without tax implications. That lifetime cap is $11.4 million right now. Remember, this is over an entire lifetime. On top of the lifetime cap, each person has a $15,000 exclusion per person. What this means is that the first $15,000 that you gift to any one person won’t count toward your lifetime cap and you won’t have to worry about paying taxes on it.

Here’s an example:

Your dad agrees to help you with your down payment. He offers to give you $15,000. The lender approves it, so you accept it. Your dad doesn’t have to pay any taxes on the gift he gave you and it doesn’t decrease his lifetime cap because it’s not over $15,000.

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Now if your dad gave you $25,000 for your down payment it would look a little different. Since the $25,000 is more than $15,000, the $10,000 difference would count against his lifetime cap. Now obviously he still has a long way to go before he meets the cap, but it’s worth knowing that it decreases the cap.

Married Couples and Gifts

The maximum gift limit applies separately to married couples. In other words, the gift must be in one spouse’s name or the other – not both. This can work to your advantage. You can split the gifts if the total amount puts either of you over the $15,000 limit. For example, a $30,000 gift could be $15,000 from your dad and $15,000 from your mom. This keeps them exempt from the taxation while staying within the law.

Filing Taxes as a Donor

Keep in mind that even if a donor doesn’t owe taxes for gift funds, he or she may still have to file the proper tax forms. Donors must complete IRS Form 709 – US Gift Tax Return. The form must be completed in order to keep track of the gifts provided that affects your lifetime maximum. You must file the return with your standard 1040 by April 15 (October 15 if you extend).

Handling Gift Funds with Your Lender

Aside from the tax implications, you as the recipient must know what your lender requires. Don’t accept gift funds without first talking to your lender. Find out what they need in regards to proof of the gift. A gift letter is a given – all loan programs require that, but what else do they need? Many lenders require a paper trail, ensuring the money belongs to the donor and isn’t a loan somewhere down the line that affects your debt ratio and your mortgage eligibility.

Lenders will tell you how to handle the disbursement of funds and what proof they need that the transaction took place. Working closely with your lender and your donor’s tax advisor will have the best outcome. Everyone will come out of the process with the end goal met – helping you to buy a home.

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The Essentials New Homeowners Must Buy

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Before you close on your new home purchase, you should know the things you need to buy once you get into your home. All too often, new homeowners focus on the closing costs and down payment, not realizing the vast number of items they need to buy once they are in the home.

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So what do you need to buy when you move into your new home? Check out our list of essentials below so that you can best prepare yourself financially for your new home purchase.

New Locks

Whether you buy an existing home or a newly constructed home, you’ll want to change the locks. You don’t know who has keys to the existing locks and it’s not worth taking a chance. New locks and keys are fairly affordable, especially if you go to your local hardware store, but you can also call a professional locksmith to come take care of it for you.

Yard Tools

If you lived in a condo, townhome or apartment before, you probably don’t own lawn tools. At the very least, you’ll need a lawnmower and weed whacker. If you live in an area that it gets cold and snows, you’ll also need a shovel and/or a snow blower. Depending on your level of gardening, you may want to stock up gardening tools too.

A Basic Toolbox

As a new homeowner, you’ll need tools to make basic repairs. Even if you aren’t super handy, there will be a time you’ll want a hammer, screw driver, and wrench. Head to your local hardware store and ask about basic toolboxes – many stores have ready-made tool boxes for people starting out just like you.

Security System

Even if you live in the most affluent area, a security system may be necessary. Not only does it protect your house, but it may give you a sense of peace. Even a basic security system can deter a burglar for fear of being caught.

Smoke Detectors

Don’t rely on the effectiveness of the existing smoke detectors or even carbon monoxide detectors. Consider replacing all of them when you move into the home, unless it’s new construction. Also, make sure there is enough smoke detectors throughout the house. If there isn’t one in every bedroom and strategically placed throughout the first level, add more in order to enhance your level of safety in the home.

Window Coverings

Unless the previous homeowner left all of the window coverings, you may find the home quite open when you walk into as a homeowner. While you can buy temporary (paper) blinds from the local hardware store, they are temporary. Eventually you’ll want ‘real’ window treatments whether blinds, shades or curtains. At the very least, find window coverings for the most prominent windows, such as bedroom windows or any windows on the first floor that give
passerby a full view of your home.

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Cleaning Essentials

Whether you buy a new or used house, trust us, it will need a good cleaning. Even if someone cleaned it for you, there are certain things you’ll just want to clean yourself, not to mention the fact that you’ll need the cleaning supplies moving forward. Stock up on the essentials such as a broom, mop, and vacuum. You may also want a carpet cleaner, duster, large bucket, and plenty of cleaners including a general disinfectant.

Appliances

Make sure you know if the seller will leave any appliances for you. If not, think about the essentials that you need including:

  • Microwave
  • Stove
  • Oven
  • Refrigerator
  • Freezer
  • Washer
  • Dryer

You may also need smaller things, like light fixtures and fans. You’ll have a good idea of what you need after you sign the purchase contract and find out what the seller will or will not be leaving for you.

Miscellaneous Items

If this is your first house, you may also need essentials, such as:

  • Ladder
  • Step stool
  • Garden hose
  • New bedding
  • Furniture
  • Towels
  • Throw rugs
  • Fire extinguisher

New homeowners have plenty of items they need/want to buy after moving into a home. Keep these expenses in mind as you set your budget. Don’t make the mistake of spending all of your money on the closing costs and down payment,, leaving yourself with nothing to spend on the essentials you need once you actually become a homeowner.

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