Down Payment Assistance Programs

USDA Loan Rules Regarding Gift Funds for Down Payment

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USDA loans don’t require a down payment, so you probably think you don’t have to worry about gift funds for this loan. However, there are times when USDA borrowers need funds from others to cover their closing costs. Just because you don’t have to put money down on the home doesn’t mean the lender and involved third-parties won’t charge closing fees.

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What are the rules for gift funds and USDA loans? Keep reading to find out more.

What are Gift Funds?

First, let’s look at the definition of gift funds. Any funds you receive from a relative, close friend, or employer in connection with the purchase of your home are gift funds. The donor provides you with the necessary funds to cover the cost of buying the home, or at least part of the cost.

Before you just accept funds from any friend or relative, though, you should know what the USDA requires regarding gift funds.

How Can you Receive Gift Funds?

Your relative, friend, or employer offers you great assistance by providing you with gift funds, but they can’t just hand you a check and think it’s all done. The USDA and their lenders require a specific process to occur in order to receive the funds:

  • The donor gives you the funds in the form of a check. A cashier’s check is best.
  • Make a copy of the check before you deposit it in your bank account.
  • Deposit the check in the bank account that you’ll use to withdraw funds for closing.
  • Keep a copy of the deposit ticket for the lender.
  • Have a copy of your bank statement showing the deposit for the exact amount of the check.
  • Leave the money untouched.

The Importance of the Gift Letter

In addition to the above process, the donor must also write a Gift Letter. This letter is just a statement letting the lender know the following:

  • The date of the gift
  • The amount of the gift
  • The reason for the gift
  • The address of the home the funds are intended for use on
  • The fact that the funds are not a loan

The donor should sign and date the letter to complete it.

Tracing the Donor’s Funds

Even though the donor provided a gift letter and you followed all of the necessary steps, the lender still must verify the origination of the donor’s funds. In other words, the lender needs to make sure that the donor didn’t borrow the funds somewhere. This is a way for borrowers to hide a loan, by having a ‘donor’ take the loan out and then gift them the funds.

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Donors can prove origination of the funds by:

  • Providing their last two months’ of bank statements to prove that they have had ownership of the funds at least that long
  • Showing proof of the sale of an asset, such as a car, boat, or stocks
  • Providing investment statements for accounts that they withdraw the funds, such as a money market account

What can Gift Funds Cover?

Gift funds for a USDA loan can cover the closing costs or even help you get a little equity in your home. It’s up to you how you want to apply the funds. If you have the money to cover the closing costs on the loan, the gift funds can be your down payment. Any money you put down gives you immediate equity in the home, which isn’t a bad thing since most USDA borrowers have no equity in their home or very little equity for quite some time.

Other Ways to Cover USDA Closing Costs

What if you don’t have access to gift funds and you don’t have the money for closing costs? There are a few ways that you can still get help:

  • Ask the seller for help – Some sellers will give seller credits to help borrowers with their closing costs. They typically do this when there’s room between the sales price of the home and its actual value. The seller will typically negotiate a higher sales price with you in order to give you the credit for your closing costs. This way the seller walks away with the same profit and you get the loan approval that you need.
  • Roll the costs into the loan – You may be able to ask your lender to roll the closing costs into your loan. Again, the value of the home must be higher than the sales price, though. Lenders cannot give you a loan amount that is higher than the value of the home. This would put them at risk for default.
  • Negotiate a no-closing cost loan – Some lenders offer a no-closing cost loan. This means that you don’t pay any closing costs at the closing. Instead, the lender covers them for you. In exchange for the no closing costs, the lender will charge you a slightly higher interest rate.

Gift funds are one of the easier ways to get help with your USDA closing costs or even the down payment, should you want to make one. As long as you follow the rules and prove the origination and transfer of the funds, you should be able to use the gift funds to help you buy the home you want.

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Down Payment Requirements for Conventional, FHA, VA, and USDA Loans

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If there’s one thing that holds many potential homebuyers back from buying a home, it’s the down payment or lack thereof. It’s hard to save money while paying rent and dealing with the standard cost of living. Many people avoid buying a house because they don’t have the standard 20% down payment that they assume that they need.

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In reality, this isn’t the case. Even conventional loans don’t require a 20% down payment. Keep reading to learn the minimum down payment for each program to see which one you may qualify for after all.

Conventional Loan Down Payment Requirements

Conventional loans carry the myth that you need to put 20% down on them, but you don’t. You can get away with a down payment as low as 5%. Let’s look at how different that looks.

Let’s say you want to buy a home for $200,000. If you abided by the 20% rule, you would need $40,000 for the down payment. If you put down the minimum down payment, though, you’d only need a down payment of $10,000. That’s a difference of $30,000 and probably many years of saving for a down payment.

Conventional loans do require you to pay Private Mortgage Insurance if you do put less than 20% down on the home, though. This shouldn’t be a deal breaker though. PMI is insurance that protects the lender as long as you owe more than 80% of the home’s value. Once you owe less than 80% of the home’s value, though, you can have the lender eliminate the PMI from your loan without requiring you to refinance the loan.

Conventional loans do have stricter guidelines than other loan programs. You will need:

  • 680 credit score or higher
  • 28% housing ratio (your mortgage payment can’t exceed 28% of your gross monthly income)
  • 36% total debt ratio (your total mortgage payment can’t exceed 36% of your gross monthly income)
  • Stable employment and income
  • FHA Loan Down Payment Requirements

FHA loans require an even lower down payment. You can put down as little as 3.5% of the home’s purchase price and get an FHA loan. This could save you 1.5% compared to the conventional loan. FHA loans do charge mortgage insurance on your loan as well. The difference with FHA loans, though, is that they charge you mortgage insurance no matter how big or small your down payment is on the home.

FHA mortgage insurance also lasts for the life of the loan. Unlike conventional loans, you can’t get it eliminated. As long as you have the FHA loan, you pay the mortgage insurance. The only way to eliminate it is to refinance the loan into a conventional loan once you owe less than 80% of the home’s value.

The FHA loan has more flexible guidelines than the conventional loan:

  • 580 credit score
  • 31% housing ratio
  • 41% total debt ratio
  • Stable income and employment
  • Proof that you’ll live in the home as your primary residence
  • No defaulted federal debt

The FHA also has one exception to the credit score rule. You may be able to get away with a credit score as low as 500 (if you can find a willing lender). The difference is that you will have to make a minimum down payment of at least 10% if you have a credit score lower than 580.

VA Loan Down Payment Requirements

If you are a veteran of the military, you have the good fortune of securing the VA loan. You need to prove that you are entitled to this benefit by providing your Certificate of Entitlement. You can obtain this if you have served at least 90 days during wartime or 181 days during non-wartime. If you served in the National Guard or Reserves, you must serve at least 6 years. No matter your branch of the military, you must also have an honorable discharge.

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If you are eligible for the VA loan, you don’t need a down payment. You can get a 100% loan. This makes it much easier for veterans to become homeowners. The VA is able to offer this option because they guaranty the loans. In other words, they back the lenders up if you default. The VA will pay the lender back 25% of the amount that they lost.

VA loans don’t require mortgage insurance. You do pay an upfront funding fee equal to 2.15% of your loan amount for regular military members and 2.4% for members of the National Guard or Reserves.

VA loans also have flexible guidelines:

  • Minimum 620 credit score
  • Maximum 43% total debt ratio
  • Enough disposable income to meet the requirements for your area and family size
  • Proof that you will live in the home as your primary residence
  • No defaulted federal loans

USDA Loan Down Payment Requirements

USDA loans are another 0% down payment option. In order to be eligible for the program, you must purchase property in a rural area according to the USDA standards. You must also have a total household income that is equal to or less than 115% of the average for the area.

If you are eligible, you won’t need a down payment for the USDA loan. You can borrow 100% of the home’s purchase price as long as it’s a modest home for the area. The USDA does charge both upfront and annual mortgage insurance. You pay the annual mortgage insurance for the life of the loan, as you do for the FHA loan. The only way to cancel it is to refinance the loan into a conventional loan.

In order to qualify for a USDA loan, you must:

  • Have a 640 credit score or higher
  • Have a maximum 29% housing ratio
  • Have a maximum 41% total debt ratio
  • Prove that you will live in the home as your primary residence
  • No defaulted federal loans

As you can see, you have many options for loans even when you don’t have a 20% down payment. Explore your options and see which loan will work the best for you to become a homeowner.

Meta Description: You don’t need a 20% down payment for most loan programs today. Learn the lowest amount you can put down for each of the loan programs today.

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