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.

Honolulu Homes and Condos Sales Market Stats September 2016

Honolulu Homes Sales Stats September 2016

During September 2016, single-family homes sales were flat compared to September 2015, while condominium sales increased by 6.7 percent compared to September 2015.

The median price paid for single-family homes in September 2016 increased by 2.7 percent from the same month last year to $750,000. The median price for condominiums increased by 4.7 percent from September 2015 to $383,250.

According to the Days on Market indicator, the median days on market for single-family homes and condominiums was 16 and 20, respectively.

"Oahu’s housing resale market in September indicates that there was no slowdown in demand as the summer came to an end,” said Kalama Kim, 2016 Honolulu Board of REALTORS® President.

“While single-family home sales were flat compared to last year, the median days on market of just 16 days show homebuyers are still aggressively seeking opportunities. Another indication that demand is still strong are the pending sales figures, which show increases of nearly nine percent for single-family homes and 14 percent for condominiums, compared to last year. We are concerned about a drop in active listings for both single-family homes and condominiums during September, as more inventory is needed to satisfy the demand for housing, which has been the case for some time."

Hawaii Foreclosure 101

Hawaii Foreclosure Process

What is a Foreclosure?

A foreclosure is a legal process by which a homeowner’s right to the property is terminated, usually due to default. It typically involves a forced sale of the property at public auction with the proceeds applied toward the mortgage debt.

In Hawaii, mortgage lenders may foreclose on deeds of trusts or mortgages in default using either a judicial or non-judicial foreclosure.

In judicial foreclosure or “foreclosure by action”, the mortgage lender files the appropriate documents with the court to rule that the homeowner is in default.

The mortgage lender then delivers the notice of default to the homeowner, or publishes the notice if they have trouble contacting the homeowner.

The homeowner has 20 days to respond. If the homeowner does not respond in 20 days, the court would find the homeowner in default and the mortgage lender can proceed with scheduling the foreclosure sale.

However, the homeowner has 30 days after the notice of default to file a notice of appeal.

A commissioner is usually appointed to sell the property at the public auction, which are usually held at the court house steps. The commissioner publishes the notice of foreclosure sale in the local paper showing the auction dates and open house dates, if any.

Any party may bid at the auction and the winning bidder is required to pay 10 percent of the bid cash or cashier’s check.
Unfortunately, the highest bidder does not automatically get the property. Additional bidding may continue at a confirmation hearing. If the court find the price fair at the confirmation hearing, then the sale is confirmed.

Non-judicial foreclosure or “foreclosure by sale”, does not involve any court action.

The mortgage promissory note usually contain a provision called a “power of sale” clause, which allows the mortgage lender to foreclose on the property upon default to satisfy the unpaid mortgage loan.

In a non-judicial foreclosure, the mortgage lender’s attorney would publish a notice of foreclosure sale once a week for three (3) consecutive weeks in a local newspaper in the county the property is located.

The last publication cannot be less than fourteen (14) days before the sale.

The copy of notice must be posted on the property and mailed or delivered to the homeowner no less than 21 days prior to the foreclosure sale.

The foreclosed property is auctioned off to the highest bidder. The auction maybe rescheduled, which happens frequently. And the notices of sale must be re-sent and re-published.

The homeowner has up to the three (3) days prior to the foreclosure sale to save the default by paying the defaulted debt along with any costs and reasonable attorney’s fee.

Hawaii offers no right of redemption for homeowners once the sale of the property is confirmed. However, homeowners in Hawaii do have up to one (1) year to redeem a tax lien foreclosure.

After the foreclosure sale, a homeowner may still face deficiency judgement if the proceeds from the foreclosure is not enough to pay off the mortgage promissory note IN FULL, meaning the property was sold SHORT.

A foreclosing mortgage lender who completed a non-judicial foreclosure of residential property is prohibited from pursuing a deficiency judgement against the homeowner unless the debt is secured by other collateral.

Read Avoid Foreclosure at All Cost.

Sell Your Home as Rent-to-Own

Rent-to-own homes

Rent-to-own, also known as lease option, is an investing strategy that can be benefit both home buyers and home sellers.
For home sellers, rent-to-own may be the perfect solution to ensure you get top dollar for your home in a buyer’s market. It may even generates some extra income for the seller before the actual sale of the home. The rent-to-own strategy also increases the number of potential buyers for your home to include those who do not qualify for the conventional mortgage from banks.
In a rent-to-own or lease option, the homeowner rents his/her property to a potential buyer (lessee) with the exclusive right to purchase the home within a certain time period, usually 3 years or longer. The homeowner cannot legally sell the property to anyone else during the period defined by the lease option. The homeowner and lessee would negotiate in the beginning of the lease the term of the lease to include the purchase price, option or earnest money, monthly payment in addition to the rent.

Decide if a rent-to-own is for you. Rent-to-own isn't for everybody. If you need all the money from the sale of your home right away, you're better off with a straight sale. In addition, the majority of rent-to-own aren't exercised, so you may have to begin the process of selling your home all over again after the lease terminates.

You might also have to consider if you want to, or aren't able to, keep up with the responsibilities of continuing to own the home. In the a rent-to-own scenario, the homeowner must continue to pay property taxes and insurance and is generally still responsible for major repairs during the lease period.

Do a background and credit check on the applicants. At this point, you have to look at potential buyers as potential tenants, and you don't want to do a rent-to-own with somebody who you wouldn't rent to. Look for someone with good references, a steady source of income, and the ability to pay the rent plus, if applicable, the additional monthly option money.

As far as the applicant's credit history, you probably don't want someone with serious credit trouble, but at the same time you may want to be somewhat lenient. Many buyers who choose rent-to-own do so because they have some blemishes on their credit and want to improve their profile before applying for a loan.

Pre-qualify your lessee. It's a good idea to contact a loan officer or mortgage broker to at least discuss the potential buyer's prospects for obtaining a mortgage at the end of the lease term. There is more uncertainty (and, hopefully, more chance of improvement) the longer the lease term, but both you and the potential buyer can get a realistic idea of whether they'll be able to buy the house.

This step is essential if it's important to you to sell the house at the end of the lease. But ethically, and perhaps legally, it's important regardless of your preference because if you take option money and above-market rent from a tenant who can't possibly buy the house at the end of the lease, you're just ripping the tenant off.

Provide the potential buyer with a seller's disclosure form. The disclosure form lists any known problems with the house. You attest, to the best of your knowledge, to the condition of the house. This form is standard for other purchase transactions but is sometimes left out in a rent-to-own. Make sure you give the buyer this form to help him or her make an informed decision and to protect the integrity of the contract and sale. The buyer should also have an independent home inspection done.

Prepare a lease agreement with option to buy and collect option money. You can get fill-in-the-blank rent-to-own forms online, but you're better off getting them from a local real estate agent or attorney. The contract is sometimes added as an addendum to a standard sales contract. Unless you really know what you're doing, get help with the details of the contract from a real estate attorney, not a or broker.

The most important thing to remember is that you've got to cover not just the money issues but also who is responsible for what types of repairs and other complications that are bound to come up.

◦ Agree on the purchase price of the home, which should be fixed on the lease contract. You'll be obligated to sell at this price, so you want to make sure it's something you can live with. Ideally, the agreed-upon price should be at least at fair market value and maybe slightly more (especially for lease terms of 1 year or more) to compensate for the convenience to the buyer and for the likely appreciation of the property over the term. You and/or the buyer may want to pay for an appraisal to validate the price. Banks and other lenders will only loan against the appraised value, regardless of the price that you agreed on with the buyer.

◦ Determine how much option money to collect. Some states and municipalities have laws specifying a maximum amount of option money that can be taken, but in general the initial option money or option fee can be almost any amount. A typical figure is 2-4% of the purchase price. You will keep this money no matter what. If the lessee decides to buy, the money will be credited toward the down payment or the purchase price, and if the lessee doesn't buy, he or she forfeits the option money to you. Keep in mind that many buyers choose lease options because they can't come up with a big down payment, so don't expect to be able to get a huge amount of initial option money.

◦ Decide how much of the lessee's monthly payment will be credited toward the option. Anywhere from 0-100% of the monthly payments can be credited toward the purchase price, although the amount is sometimes subject to state or local laws. In general, the monthly payment will be calculated at fair rental value plus a set amount that will go toward the purchase price. This, like the initial option money, will either be credited toward the down payment or the purchase price or, if the tenant doesn't buy, will be forfeited to you.

◦ Decide on the term of the lease. Lease options typically run anywhere from 6-24 months. Less than six months usually doesn't make sense for the buyer, and more than 2 years (sometimes more than 1 year) may cause tax or legal complications. Shorter lease terms generally result in sales more than longer terms, simply because there are so many variables over the long term, but the length of the lease should be adequate to ensure that the lessee has time to get his or her financial ducks in a row. Keep in mind that if housing prices appreciate quickly, you may be getting a bad deal on a long lease, since you're obligated to sell at the agreed-upon price. If housing prices decline, however, you may be getting a good deal, but if they've declined significantly, the lessee is unlikely to buy the house. You still get to keep the option money, however.

Get the right home insurance coverage. Since you will no longer be the owner-occupant of the house, you may need to update your homeowners insurance policy to a dwelling policy. Check with your insurance agent to determine what policy is necessary and what coverage you need. Your tenant should also be insured to cover his or her liability and, depending on your state, any gaps in your coverage that may result from the lease option.

Collect monthly payments. Now, all you need to do is collect the payments each month. Keep track of the payments received so you'll have a record when the time comes for the lessee to exercise the option (or, in the the worst-case scenario, when you have to go to court to settle a dispute).

Sell the home. At the end of the lease term, the lessee can exercise the option to purchase your home for the price specified on or before the date specified. The total option money paid (including the initial option money plus any credit from the monthly payments) will go toward the down payment. Thus, the buyer already has equity in the home and should find it easier to qualify for a mortgage.

Read Buy Your Perfect Home with Rent-to-Own.

Homeowners’ Guide to Avoid Foreclosure at All Cost

Short Sale vs Foreclosure

Homeowners facing economic hardships may have a foreclosure looming, but are often too proud or uninformed to do anything about it, until its too late.  Before considering bankruptcy or allowing the bank to foreclose, consider a short sale.  

Unlike a short sale, foreclosures are initiated by lenders only. The lender moves against delinquent borrowers to force the sale of a home, hoping to make good on its initial investment of the mortgage.

Also, unlike most short sales, many foreclosures take place when the homeowner has abandoned the home. If the occupants have not yet left the home, they are evicted by the lender in the foreclosure process.

Once the lender has access to the home, it orders its own appraisal and proceeds with trying to sell the home. Foreclosures do not normally take as long to complete as a short sale, because the lender is concerned with liquidating the asset quickly. Foreclosed homes may also be auctioned off at a "trustee sale," where buyers bid on homes in a public process.

In most circumstances, homeowners who experience foreclosure need to wait a minimum of five years to purchase another home. The foreclosure is kept on a person's credit report for up to seven years.

Although there is no guarantee your lender will agree to a short sale, here is a list of the benefits of participating in a short sale, versus being foreclosed upon. 

Benefits Of A Short Sale Versus Foreclosure

• Homeowner can apply for a short sale even if they're not behind in payments.

• There in ZERO COST to the homeowner in short sale. The lender pays all the selling costs and real estate commission. Meaning the homeowner has nothing to lose!

• The homeowner receives professional guidance from real estate agent when doing a short sale.

• A short sale may postpone the foreclosure action to allow enough time for house to be sold.

• Homeowner may qualify for financial or relocation incentives from the lender, and receive up to $10,000 for relocation from a government program called HAFA which provides an option for homeowners transitioning out of their mortgage.

• A short sale only affects your credit score between 50-70 points vs 200-400 points with foreclosure.

• Homeowner may qualify for another mortgage loan as soon as 2 years, as compared to 7 years with a foreclosure.

• Doing a short sale avoids foreclosure and waives the full deficiency owed by the homeowner. They can now walk away from the property free and clear.

• Possible tax relief from cancellation of any debt income.

• Short sales are not likely to affect jobs that require a security clearance.

• It is easier to recover financially and emotionally from a short sale than a foreclosure.

If you plan to simply pack up, leave and “let the bank have the property”. This is the worst idea ever for the following reasons:

• If you leave the house, you will still owe the balance on the mortgage plus penalties and late fees (which in many cases is tens of thousands of dollars). This means that by law you are responsible for paying off this balance over the next 10 to 20 years for a property you no longer own!

• If you walk away from the house, the bank will still try to recover the money. They can legally do this by garnishing your future wages and investments!

• If you let the property go into foreclosure, your credit score can be affected up to 400 points. This means that it is going to be hard to find somewhere to rent (if they do credit checks). It is going to be hard to get another mortgage for a very long time with a foreclosure on your record. It is also going to be hard to get credit (in general) with a foreclosure on your record.

• Having a foreclosure on your record can also be a hindrance in getting a job, especially ones that require security clearance.

Read What is Short Sale?.

 

Short Sale vs Foreclosure

Honolulu Real Estate Market Stats July 2016

Honolulu Real Estate Market Stats July 2016

“While sales of both single-family homes and condos dipped compared to the previous year, the increase in prices year-over-year for both indicates the housing market is still very strong,” said Kalama Kim, 2016 president of the Honolulu Board of REALTORS®.

“The drop in condo sales is typical of the cyclical nature of the real estate market. Historically, we’ve seen a peak in condo resales during the summer, followed by a slight dip the following month.

As for prices, a decrease in the number of sales with a corresponding increase in prices usually means buyers are being more aggressive with their offers.”

Honolulu Real Estate Market Stats June 2016

Honolulu Home Sales June 2016

During June 2016, sales of single-family homes were flat compared to June 2015, while condominium sales increased by 9.8 percent compared to June 2015. The median price paid for single-family homes in June 2016 increased by 8.6 percent from the same month last year to $760,000. The median price for condominiums increased by 19.6 percent from June 2015 to $405,500. This represents new record highs in median price for both single-family homes and condominiums. According to the Days on Market indicator, the median days on market for single-family homes was 14 days, and 20 days for condominiums.

“The demand for single-family homes was especially high in June with the median days on market setting a record pace at just 14 days,” said Kalama Kim, 2016 president of the Honolulu Board of REALTORS®. “Both single-family homes and condos surpassed the previous high marks for monthly median prices. However, a closer analysis of these figures shows that the median price for single-family homes was skewed a bit by the sale of 20 properties for $2 million or more. Affordable homes are still available, as 124 of the properties sold were for under $700,000. As for condos, 267 units were sold for under $400,000. Despite rising prices and increased competition for properties, we continue to recommend that potential homebuyers should consider widening their search for housing that best meets their needs and budget.”

Read more...

Honolulu Real Estate Market Stats May 2016

slow but steady growth

During May 2016, sales of single-family homes increased by 3.2 percent compared to May 2015, while condominium sales increased by 6.0 percent compared to May 2015.

The median price paid for single- family homes in May 2016 increased by 3.0 percent from the same month last year to $719,000.

The median price for condominiums decreased by 0.5 percent from May 2015 to $373,000. According to the Days on Market indicator, the median days on market for single-family homes and condominiums was 17 and 15, respectively.

Buy Leasehold Properties for Cash Flow

Leasehold Properties for Cash Flow

Hawaii real estate is unique in that many land on which building stands are owned by separate owner. The Bishop Estate owns many land in Hawaii, and so are many private owners.

What is leasehold properties?

Leasehold properties are buildings or structure that stand on a leased land. The owner of the building or structure own all of the structure on the land, but pays lease rent for the land on which is the building or structure sits.

Most home buyers shy away from leasehold properties because they are afraid of the lease rent and lack of control. Most home owners wants to own their home AND the land under it free and clear. Besides, lease are renegotiated every so many year, so there is chance that the new negotiated fees may be more than what the owner wants to pay, and this makes many people uncomfortable with purchasing leasehold.

Besides, it is generally more difficulty to get financing from banks, especially if you don’t have the cash, and needs financing. Most banks require the leasehold properties to have at least another 50 years remaining on the lease.

Some banks may be able to finance your leasehold properties purchase with portfolio lending.

At lease expiration, it is up to the lease fee owner to either extend the lease for or take the land back. In the case, where the lease fee owner decides to take the land back, that means the building on the land has to go “poof” or demolished or the lease fee owner may take the building and do whatever they want.

This is the biggest fear of leasehold properties purchase.

But Why You Still Want to Buy Leasehold Properties for Cash Flow?

For a savvy real estate investor, purchasing leasehold properties make sense. If you ask 10 people, 9 of those would tell you Honolulu is a horrible place for real estate investors because real property price is too high to provide good cash flow.

These people are missing out on a big lucrative market.

The purchase price of a leasehold property is usually a lot cheaper than fee simple. Of course, you’re not buying the land. You’re only paying for the structure. You pay the lease rent, or should I say your tenant pays the lease rent for you. But YOU write off the lease rent as tax deduction as operating expense.

This is how you can get properties with CAP rate of 6% or more. If you manage your property well and put it into good use, you can get even up to 30% CAP rate.

I can show you how.

If you get yourself a good deal, and you recooperate most of your initial investment before the lease expiration date, you’ll not have to worry about the lease fee owner taking the land back because you would have made your money back many times. If the lease fee owner extends the lease, that’s even better for you, your property continues to generate cash flow for you.

Here's another trick, I generally look for condo buildings where the lease fee is available to purchase. This gives me more control, and I know it will be my choice to give up the condo when the lease expires.

The other benefit is that when I'm ready to refinance, I can purchase the fee and own the condo free and clear.

The best time to buy a leasehold condo is when the condo AOAO just purchased the lease fee for the building and selling to the owners. This usually put pressure on the condo and many would choose to give up and sell their condo as leasehold. This makes them motivated to sell as many does not have the mean to purchase the lease fee or to get financing to purchase the fee.

Leasehold Property and Sandwich Lease

The concept of using leasehold property for investment is sort of similar to a sandwich lease.

In sandwich, you, the investor rent (lease) a condo from the owner, and you turn around to sub-lease the unit to a renter.

Say, you found a really nice rental property in a nice, highly desirable neighborhood with good school. The owner is asking for $2,000 a month rental income. You know you can rent this for $2,200. You rent the unit from the owner for $2,000, then you find a renter who is willing to pay you $2,2000 per month for this same unit. In this case, you cash flow with none of your own money $200 per month. No maintenance on your part either, because you’re not the owner.

Before you to start doing this, you need to be sure that the owner is okay with you sub-leasing. Just common courtesy.