Category Archives: Down Payment

The down payment is frequently the missing piece of puzzle that stop many people from homeownership. Down payment may be reduced in some mortgages or it can come from many sources.

Gift Money or Gift Funds for Down Payment

Gift Money for Down Payment

What You Need to Know…

What You Need to Know About Using Gift Money or Gift Funds for Down Payment

Gift funds for down payment on home purchase is allowed by both FHA and Fannie Mae and Freddie Mac, however, there are rules and regulations with regards to gift funds and each loan program has their own lending guidelines on gift funds. 

Many families help each other out, especially in Hawaii. Gifting money also helps with estate tax later.

A parent may give their children gift funds to purchase a home.  A grand parent may give their grandchild gift funds to be used towards the down payment of their home purchase. A couple may get gift funds as their wedding gift from family or close relatives where they can use that as a down payment for their home purchase.

Why Are Lenders So Uptight About Gift Funds?

Mortgage lenders want to make sure that the gift funds are actual gifts and not loans. If an applicant were to borrow part of the funds required to complete the transaction, that monthly expense would need to be accounted for in their debt-to-income ratio. Mortgage lenders want you successful in making your mortgage payments.

Gift funds do not need to be repaid, so there is no additional burden on the borrower. And it is the only type of financial assistance that doesn’t change the borrower’s capacity to borrow, it has historically been one of the most abused and cheated aspects in lending.

To combat such fraud, underwriting guidelines have been put in place to ensure that the gift fund is in deed a real gift!

Before you accept gift funds for down payment on a home purchase, check with your loan officer for instructions. 

You loan officer will tell you that gift funds for down payment needs to be sourced.  The donor of gift funds for down payment on your home purchase needs to complete a gift letter which states that the gift funds is not a loan and that the gift funds does not need to be paid back. 

The donor of the gift funds needs to provide 30 days of the donor’s bank statement showing that the gift funds was seasoned in the donor’s bank account for at least 30 days. The gift funds leaving the donor’s account needs to be reflected in the bank statement of the donor. 

The recipient of the gift funds needs to provide the copy of the check, the deposit slip, and a new bank transactional history print out that is signed, dated, and stamped by the bank teller reflecting the funds in the bank account of the recipient.

The Gift Letter must contain the following information:

The donor’s name, address and phone number
The donor’s relations to the homebuyer/recipient
The dollar amount of the gift for down payment
The date that the gift fund is transferred to the homebuyer
A written statement from the gift donor’s stating that the fund is a gift and NOT a loan that needs to be repaid.
The gift fund donor’s signature
The address of the property to be purchased.

Gift funds can only be given by a close family member.

The person giving the gift will need to:
§ Sign a Gift Letter that includes their complete contact information and amount of the gift.
§ Provide a copy of the check or financial instrument used to transfer the gift.
§ Provide proof that they themselves had the ability to give the gift (the money was in their account).

The gift recipient will need to provide proof those transferred funds were deposited in an account they hold.

How Much of the Down Payment Can be from a Gift?

That depends on the type of home loans.

For conventional home loans, if you putting 20% down payment or more, then the whole amount can be gifted.

However, if you’re putting less than 20% down, only part of the down payment can be from a gift fund, and the rest has to be from your own fund.

Gift funds for down payment is only allowed on owner-occupied primary and second residences. Gift funds are not allowed for investment property purchase.

What About FHA Loans and VA Loans?

Both FHA loans and VA loans allow 100% gift funds for down payment for home purchase. Both loans are for owner-occupant only.

If you are purchasing an investment property, gift funds cannot be used at all, period.

It is VERY important to note that if gift funds are provided early enough in the process, and those funds have remained in the borrowers own accounts for more than 60 days, no gift funds supporting documentation is required.

Gifts are not restricted to only money. Gifts can also be in the form of equity in a property. If parents wish to have their child purchase a property from them, the parents can gift a portion of the equity to be used as the child’s down payment.

What Else Do You Need to Know About Gift Money…

Gift Tax, sometimes confused with Inheritance or Estate Tax, is a tax on the transfer of cash, asset, property from one person to another while receiving nothing in return, in another word, as a gift.  

In most states, the tax applies whether the donor intends the transfer to be a gift or not.  

The Gift Tax and Estate Tax are closely related.  The IRS allows you to give up to $14,000 per year to any number of people without incurring any gift taxes.

If the gift exceeds $14,000 in a given year, the person who makes the gift, not the recipient, has to file a gift tax return and pay any tax owed. However, there is $5,430,000 lifetime exemption before you have to pay gift tax.

Any gift that exceeds the annual exemption of $14,000 reduces your estate tax lifetime exemption of $5,430,000.  For example, you give your son $114,000 in 2015.   $14,000 is exempted while you have to file a gift tax return and report that you used $100,000 of your $5,430,000 lifetime exemption.

Here’s the good news…

There is NO gift tax in Hawaii.  All Gift Tax are exempt in the State of Hawaii.

If the total estate asset (property, cash, etc.) is over $5,430,000, then it is subject to the Federal Estate Tax.

Find Your Hidden Down Payment

Down Payment

Need some help with down payment? You'll be surprise where your next home down payment may be hiding.

The biggest challenge for most home buyers is coming up with a decent down payment and closing costs.

Whether you’re trying to scrape by with 3.5 percent for an FHA loan or you’re planning to put down a full 20 percent, saving for a down payment might be the largest savings endeavor you ever undertake, after retirement planning.

Don’t let this be the obstacle that stop you from your dream of becoming a home owner. With some looking and creativity, you’ll be surprise that there are money everywhere in front of you waiting for you to grab.

This does involve some work and effort on your side. Hey, nothing’s free in this world. And nothing good is free.

1. Your budget’s biggest line items. Take a look at your top 10 or so monthly expenses, there are almost always at least one or two items that you could do without, that you’ll end up with more cash at the end of each month.

This takes discipline and how passionate you are about becoming a home owner.

I have a friend who moved her whole family back to her husband’s family for 6 months, saving the rent for their down payment for a bigger house. Go from two cars to one car to get rid of one car payment, or down size to a smaller car. Cancel cable services, or switching to a cheaper phone service providers. By the end of the year, you’ll be at least several thousand dollar richer.

2. Your bad habits. Saving for a down payment is a great time to kick your bad habits. If you smoke, that will be the number one habit to kick. First and second hand smoking causing harm to both the one who smokes, and the people around him/her. Not to mention to raising tax on smoking habits. Instead of eating out at restaurants with friends, invite your friends over for dinner. Stopping drinking and buying soda or any sugary beverages and alcohol beverages. These only add to your medical bills in the future. Water is your best friend. But don’t spend money on bottled water either. The plastic bottle contributes to pollution, and erosion of your wallet. Install faucet mount water filter system and refill your own bottle.

Whenever you fill deprive of your old habits, visualize yourself in your dream home. That will help you stay on track on your saving goals.

3. Your stuff sitting around. Do you have extra stuff sitting around that you don’t used? Now is a great time for some spring cleaning to get rid of things you don’t need. You can sell these on eBay, Craigslist, garage sale.

The extra money you make will contribute to your down payment, getting you closer to your dream home.

Think of it this way, when you finally closing on your home, you’ll have to clean anyway, do it now when you have the time and make some money. After all, you don’t want to pay someone to move your junk to your new home, right?

4. Your spare room or extra seats in your car. Millions of home owners worldwide are now renting out rooms or floors of their current homes for short periods of time on sites like Airbnb and VRBO.

Sites like uber and turo allow you to rent out the extra seats in your car - or the whole vehicle, if you’re not too faint of heart!

5. Your skills and time. Got extra time still after selling your stuff? Leverage your earning power during your off-time, evenings and weekends with your professional skills or personal hobbies to bring in some extra cash.

If you love doing crafts, you can sell creative items on Etsy. In Hawaii, many houses have fruits trees in the yards. You can sell the fruits from your tree at local farmer’s market. Do you have a special recipe that everyone enjoys? Sell that at local farmer’s markets.

You can also earn extra money with cooking, house cleaning, babysitting or dog walking. The opportunity is limitless.

You can also list your services on sites like TaskRabbit. You can also sign up for Mechanical Turks at Amazon, where you can complete tiny miscellaneous task for a fee.

6. Your loved ones. Many people are aware of the benefit of owning a home, so most family member are willing to help. If your parent, sibling or auntie has mentioned their interest in helping you with home purchasing, show your gratitude and let them know of your plan. You’ll need to discuss the details, such as their financial contribution, tax or estate planning.

Alternatively, if your home buying plans are timed alongside your wedding plans, graduation plans or new baby due date, consider opening a down payment registry, so well-wishers can funnel their gift funds right into your real estate savings.

In either of these case, you may need to discuss before hand with your loan officer as there are limitations and documentation regarding down payment fundings.

Related article: Money or Gift Funds for Down Payment

Don’t forget you can also team up with BFFs, siblings, parents or other loved ones to buy a place you can jointly own and/or live in. This arrangement might help you and your loved one accomplish your respective financial and real estate goals.

7. Your employer. Some employers actually offer down payment and other forms of mortgage assistance to employee, especially universities and government agencies that requires you to live locally for their jobs (e.g., police, fire and other emergency personnel) often have housing assistance programs that can include down payment funds or access to mortgage programs with lower down payment requirements.

Even if you don’t work for one of these sorts of agencies, touch base with your human resource department to see if there are any relocation benefits that can help you with your down payment you need to make your move.

8. Your city, county or state. Down payment assistance program are available at both state and county levels. Shop around different banks and mortgage company for down payment assistance program because not all banks will do that, and each may have their own areas of specialty.

These assistance programs are usually available to first-time home buyers (person who has not own a home in the area in the last 3 years), low- or moderate-income households, and purchasing home in certain areas, such as the USDA loans for rural home buyers.

A good place to start is the Hawaii Home Ownership Center, which is dedicated to educating and helping first time home buyer. The down payment assistance program usually has limited funding so start your home buying process early.

Check out The DPAL Program

Finally, don’t forget to set up a separate account to stash your savings away and keep it away from your spending money.

There’ll be sacrifices involved. But ultimately it is what’s important to you.

Recently I asked my 15-year-old daughter, “Do you rather have a nice car or a nice home?” She answered, “a nice home”.

So proud of her shrewdness.

Related article: Home Buying Tips

Make Money with Your (dream) Car

Make Money with Your Dream Car

Turn Your (Dream) Car into A Money-Making Asset

All we business- and money-savvy few knows that a car is NOT an asset, unlike what the banks like to tell everyone.

Our car is a liability that keeps the expenses going each year and keeps depreciating every second.

One of my goal for financial freedom is drive my dream car for FREE.

First of all I have not acquired my dream car yet. It would have been against all the "Millionaire Next Door" principles. I have to amess my wealth first.

So what does uber have to do with my financial goal of driving my dream car for FREE?

Let use my current car as an example. I drive a 2014 Prius II. Here's my breakdown of my monthly car expenses:

Car payment $350
Gas $40
City & County registration $25
Auto insurance $67
Safety check $3

Remember, you don't get to write off any of these expenses on you tax return if you're AN EMPLOYEE, and does not own any business.

Now with uber, you're using your beloved vehicle to generate income as a sole proprietor, which switch you to a business entity.

Say you make $900 a month with uber, you are now $415 richer after all your usual monthly auto expenses. This is what I mean by drive for FREE.

Now apply this same principle to your dream car. You got the idea?

This is not it yet. At the end of the year, you can deduct your auto expenses (prorated for the portion you use your car for your uber business).

In order to get your tax deduction for your auto expenses, remember to keep good mileage record. This will help you determine the percentages of your car that is used for business to generate income. Say you drove a total of 14,000 miles this year, and out of that you drove 7,000 miles making money with uber. In this case, you can deduct 50% of all your auto expenses, don't forget you can deduct your car washes too.

Turn you car into a money-making machine with Uber Honolulu.

If you love meeting people, driving uber is super fun...

If driving strangers around is not your thing...consider renting your car out when you're not using it.

Just like Airbnb and VBRO.com

You list your car and keep a calendar of when it's available. Then wait for some interested party, then you meet, you check their license, insurance, etc.

For a limited time, you can earn up to a $100 bonus by listing and renting out your car as a new host. Your bonus will be 25% of your earnings for trips you approve in the first 60 days, up to $100.

Check it out at turo.com

Same as with driving Uber, you can still write off vehicle expenses, such as auto insurance, car washes, gas, maintenance, etc.

Related article: Deducting Business Expenses

This is how the US government rewards people who make an effort to make a better life for themselves.

Zero Down USDA Home Loan

For home buyers today, there are two mortgage programs that offer 100% financing.

The first is the VA loan from the Department of Veterans Affairs. It's available mostly to active duty military personnel and veterans nationwide.

The other is the U.S. Department of Agriculture's Rural Development Single Family Housing Loan Guarantee Program. The USDA home loan is sometimes called a "Rural Housing Loan" or a "Section 502" loan.

Similar to FHA loan, USDA does not generate the loan. It insures mortgage lenders against loss 100%. The program is meant to drive homeownership in rural and underdeveloped areas.

The USDA Home Loan program in Hawaii offers very low interest and mortgage rate than any other institution. USDA home loans in Hawaii also offers the options for renovation, repairing, building a home from scratch and even paying off old debts.

The USDA does change its "rural areas" fairly regularly and an expanding town is apt to lose its rural loan eligibility with the next census. Homes which are USDA-eligible today may not be USDA-eligible next year.

Benefits of a USDA Home Loan

USDA home loans are very similar to conventional loans backed by Fannie Mae and Freddie Mac.

Unlike conventional loans, USDA home loans have no down payment requirement, which allows a home buyer to finance up to 100 percent of its purchase price. The U.S. Department of Agriculture assesses a two percent mortgage insurance fee to all loans, and the cost may to be added to the loan size at the time of closing, as can the costs of eligible home repairs and improvements.

RELATED ARTICLE: Why Private Mortgage Insurance Sucks

You can't do that with a Fannie Mae or Freddie Mac loan.

Another benefit is that its annual mortgage insurance fee is just 0.40%, which is less than half of most private mortgage insurance charged on a comparable conventional loan, and only one-fourth of what the FHA will charge.

USDA home loans do not have loan size limitation, which means home buyers can theoretically borrow more money with a USDA mortgage than with a conventional, VA or FHA loan.

Loans insured by the U.S. Department of Agriculture are available as 30-year fixed rate mortgages only, and come with their own USDA Streamline Refinance program.

Qualifying for USDA Home Loans in Hawaii

The factors that will determine your USDA eligibility are current income, credit history and also the zip code of the country where the home is situated. USDA loans are specifically for moderate to low income households thus; there is an income limit for each USDA home loan eligible county.

To be eligible for USDA Home Loans in Hawaii, your yearly income should be less than 115% of the average median income for that area. You will qualify for a USDA Loan if your income is quite less than the average median income.

Check here to see if you meet the USDA Loans Income Requirements

You should have an average credit score of at least 640, maintain a steady flow of income, and should have no foreclosures that are unsettled and no bankruptcies in the past 3 years.

Get your FREE credit score at CreditKarma.com

RELATED ARTICLE: Increase Your Credit Score to Get Your Mortgage Pre-approved

Other qualifying criteria:

• The subject property must be a primary residence
• The buyer must meet a qualifying ratio of 29 percent for housing costs; and 41 percent for total debt
• The buyer may not own another home within commuting distance of the subject property

Most importantly, the property must be located in one of the USDA designated areas. USDA property eligibility is determined by census tract density. USDA designated rural area usually has a population of less than 20,000 residents. Because of the way the USDA defines "rural", there are plenty of ex-urban and suburban neighborhoods nationwide in which USDA loans can be used.

USDA-designated areas in Hawaii:

Big Island – all areas except Hilo

Kauai, Lanai, Molokai – all areas

Maui – all areas except Kahului and Wailuku

Oahu – Village Park and Royal Kunia subdivisions, Ewa Beach, Makakilo, Kapolei, entire Waianae Coast, Central Oahu from Whitmore Village North to North Shore and Kunia, entire North Shore, Windward Oahu from Kahuku South to Ahuimanu, Waimanalo from Olomano Golf Course to Sea Life Park.

If you fulfill all these criteria, you should be eligible for a USDA Loan in Hawaii.