Buying a house can be difficult, particularly if you have to pay a down payment toward the value of the house. For first-time homebuyers, home affordability is even more challenging as they don’t benefit from the liquidity of selling a home.
For most home loans, the down payment ranges between 3.5% and 20% of the home value, which makes it a significant expense. That’s where down payment gift money from relatives and family members is of assistance.
The current real estate market is quite expensive and many buyers find it hard to put down a reasonable down payment to secure a mortgage. Borrowers also have to add credit closing costs, the cost of loan appraisal, as well as the cost of moving into their new home. All these expenses can dent most people’s budget and impact their personal finances negatively.
Luckily, down payment gifts can make life easier. Family members and relatives can gift some money to their children as down payment assistance and alleviate a little bit of the financial burden. Homebuyers can use down payment gifts, as long as they have the right documentation and can prove that their relative doesn’t expect to get paid back.
What Are Down Payment Gifts?
Down payment gifts are funds generously given by family members, friends, or others to help you buy a home. Most lenders only accept family members and relatives to gift money toward the down payment.
You can use gift money to significantly reduce the financial burden of acquiring a new home. This is a popular way to support consumer access to home loans, particularly for first-time home buyers who are entering the property market. Gift money is often used to get a home loan for buying a primary residence, but gift money can also be used for second home mortgages, for home improvement loans, or to refinance a current home loan.
How Do Down Payment Gifts Work?
The process is straightforward but understanding the terms and conditions of fund gifts and following down payment gift rules is essential in order to be able to use them.
The donor gives you a sum of money to be used specifically for your down payment. It’s important to remember that this money is a gift, not a loan, which means it doesn’t need to be repaid.
Your relatives will have to state clearly they do not expect to be repaid. This detail matters to your bank, because if you are expected to repay the money gifted to you, then your debt-to-income ratio (DTI) increases. Using gift money for your home loan does not impact mortgage rates, mortgage terms and conditions, credit score required, or the home insurance amount required to close the home loan.
What’s the Limit for Down Payment Gifts?
There are no limits on how much can be gifted if you’re applying for a conventional loan to purchase a home. However, there is a limit of $17,000 per family member, beyond which the person lending the money has to pay taxes. So, if both parents are giving their child a down payment gift, the limit is $34,000 before the gift tax kicks in.
However, if your home loan is backed by the government, like an FHA loan, different rules may apply. We recommend consulting with our loan specialists to understand the specific limits and guidelines for your loan type.
To ensure a smooth process, proper documentation is key. You will need:
A gift letter
The donor must write a gift letter, stating the amount of the gift, their relationship to the recipient, and a clear declaration that the money is a gift and not a credit, and that it’s intended for buying a home.
The mortgage gift letter should include:
- Donor’s Details: The donor’s personal information, including name, address, and phone number.
- Relationship to the Buyer: It should clearly outline the donor’s relationship to you, the homebuyer.
- Gift Amount: Gift letters need to provide the exact amount of the gift must be specified.
- Statement of Non-Repayment: The mortgage lender may require the donor to explicitly state that the gift is indeed a gift and not a loan, meaning there is no expectation of repayment.
- Property Details: The letter should mention the address of the property you intend to purchase with the gift.
- Proof of donor’s financial ability: There should also be proof of the donor’s ability to provide the gift, which could be a bank statement or other proof of income.
- Evidence of balance transfer: The transfer of funds from the donor’s deposit account to your bank account should be traceable. Bank statements or transaction records are typically required, which means you generally can’t use a gift of cash, especially if you can’t specify their source.
Necessary Considerations Depending on the Home Loan Type
Different loan types might have specific rules regarding down payment gifts.
A conventional loan lender, including Freddie Mac and Fannie Mae, allows for down payment gifts from family members including parents, siblings, grandparents, aunts and uncles, and even in-laws, fiancé(e)s, or a romantic partner. Money can’t come from a business or from parties involved in the transaction, such as the lender or the real estate agent. The gift does not impact your mortgage rate.
FHA loans have a lower down payment requirement compared to conventional loans, which usually stands at 3.5%. Federal Housing Administration borrowers can receive down payment gifts from relatives and family members as well as their employer, labor union, and even a charitable organization, to buy a house.
Mortgage loans for veterans are a type of loan that doesn’t require down payments. You can, however, consider a funds gift for funding fees.
Veterans Affairs funding fees are usually rolled into the mortgage itself but homebuyers can use gift funds to pay these fees or to lower them to more manageable levels.
A gift of money can also be used to make a down payment to lower your VA loan monthly payment or to cover the closing costs.
USDA loans, guaranteed by the US Department of Agriculture, come with no down payment requirements. However, gift money is not only for a down payment. Gift funds can be used to pay for the closing costs and they can come from friends, relatives, and any other party as long as they are not involved in the property transaction.
Begin Your Homeownership Journey With Society Mortgage
Down payment gifts can be a game-changer, particularly for the first-time homebuyer. With the support of family and friends, reaching homeownership is more achievable than ever.
Call us for information on our mortgage loan services. Contact a mortgage loan officer today to learn more, compare your loan options, and take the first step towards buying your own home, whether you are a first-time home buyer or not.
Frequently Asked Questions
No, mortgage gifts are strictly gifts and must not have a repayment requirement. Mortgage lenders may require a gift letter that explicitly states the donor does not expect repayment. This is because your ability to repay the mortgage could be affected if you also have to repay the gifted funds.
The rules for who can give you gift money depend on the home loan type and lender. Generally, you may not receive gift money from someone with a vested interest in the home purchase, such as the seller, lender, real estate agents, or home builder company.
For government-backed loans like FHA and USDA, a wide range of donors are allowed, while conventional mortgage products usually limit donors to family members.
There aren’t specific limits on the amount of money someone can gift you for your mortgage down payment. However, you may not be allowed to cover the entire down payment with gifted funds, depending on the property type and the amount of your down payment. The lender may require you to contribute at least a portion of the down payment from your own funds, especially if you are planning to buy an investment property.