For many home buyers in Washington, there are two primary obstacles to buying a home. The down payment and closing costs. But they might only be perceived obstacles. There are ways to reduce these upfront expenses.
This article explains how home buyers in Washington State can get closing cost help from family members or other approved sources.
How to Use Closing Cost Gift Money from Family
These days, most mortgage programs allow borrowers to use gift money from an approved source. These funds can be applied to the home buyer’s down payment as well as the closing costs, in some cases.
Depending on the type of loan being used, the gift money might come from a family member, a close friend, an employer, or even an approved housing agency. Family members are one of the most common sources of these funds.
For example, let’s look at some of the guidelines established by Fannie Mae.
Along with Freddie Mac, Fannie Mae is one of the two government-sponsored enterprises that buy loans from mortgage lenders. These two corporations have specific guidelines and requirements for the kinds of mortgage loans they can purchase. And these requirements can “trickle-down” to Washington home buyers and mortgage shoppers.
Here’s what Fannie Mae says about borrowers getting help with their closing costs:
“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.”
Relatives Yes, “Interested Parties” No
So this is one way home buyers in Washington could get closing costs from a third-party contributor. Using gift money from an approved source can reduce or even eliminate the buyer’s out-of-pocket expense, making it possible to buy a home sooner and with less funds.
But the money can’t come from just anywhere. There are rules about who can provide closing cost help for home buyers in Washington.
Going back to the Fannie Mae guidelines, we find the following distinction:
- Generally speaking, down payment or closing cost gift money can be provided by a relative of the borrower. In this context, a relative is defined as “the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship.” It could also be a fiancé / fiancée, or a domestic partner.
- However, the person providing down payment or closing cost gift money cannot be an “interested party” to the transaction. This means it cannot be a real estate agent, home builder, or developer.
The Federal Housing Administration also allows third-party contributions for home buyers who use an FHA loan to buy a house in Washington. These funds can generally be applied to closing costs or down payments. They also have similar rules regarding who can (and cannot) provide gift money to the buyer.
A Letter Must Be Provided
Regardless of whether you’re using a conventional or FHA loan, any gift money applied to the down payment or closing costs in Washington must be documented. This is a pretty straightforward requirement. The person providing the funds must write a letter that states their relationship to the home buyer.
The “gift letter” must also clarify that the person donating the funds toward closing costs or down payment does not expect any kind of repayment. In other words, the funds must truly be a gift — not an interpersonal loan.
The bottom line is that there are workarounds and alternatives for home buyers in Washington State who cannot afford all of their closing costs and/or down payments. This is why it’s so important to speak with a knowledgeable loan officer about your financing options. Homeownership might be more within reach than you realize.
Need a Home Mortgage Loan?
Will you need mortgage financing to buy a home in Washington State? We can help. Sammamish Mortgage has been serving buyers across the Pacific Northwest for more than 25 years. We currently lend in all of Washington, Oregon, Idaho, and Colorado. Sammamish Mortgage offers a wide variety of mortgage products and programs with flexible qualification criteria. Please contact us today with any financing-related questions you have.