When it comes to buying a home, one of the biggest obstacles for many buyers is the down payment. But did you know, borrowers can use gift funds for that down payment?
Believe it or not, many homebuyers turn to family and friends for financial help.
25% of homebuyers ages 23 to 31 and 17% of those ages 32 to 41 received gifts from relatives or friends to help with their down payment, according to the National Association of Realtors.
Secondly, down payment requirements are much different today than they have been in the past, as FHA loans and some conventional loans often have low down payment requirements, as little as 3% in some cases.
And, yes, borrowers can absolutely use gifts from family members toward those down payments!
Who Can Gift Down Payment Funds?
Lending regulations won’t allow borrowers to use a cash gift from just anyone to qualify for a mortgage. The funds usually must come from a family member, such as a parent, grandparent, or sibling.
It’s also generally acceptable to receive gifts from your spouse, domestic partner, or significant other if you’re engaged to be married.
Restrictions on Down Payment Gifts
Both conventional loans and FHA loans allow gifts as down payments. There is no minimum borrower “contribution” for a one-unit, primary residence, even when bringing in less than 20% down for conventional loans.
That gift can cover the entire down payment and the closing costs.
For 2-4 unit primary residential properties, the borrower must make a 5% minimum borrower contribution from their own funds, per lending regulations for conventional loans. FHA loans do not have this requirement.
After the minimum borrower contribution has been met, gifts can be used to supplement the down payment, closing costs, and reserves.
It’s important to know that gift funds may NOT be used for investment property purchases.
Mortgage Gift Rules by Loan Type
FHA loans: The Federal Housing Administration (FHA) backs mortgages with a minimum down payment of 3.5 percent. The entire amount can be gifted, but the FHA requires a letter and supporting documents from the gifting party. Bank/asset statements showing the giver has had the funds for 60 days will be required.
Conventional loans (Fannie Mae/Freddie Mac): When purchasing a single-family residence, the entire down payment can come from a gift. These funds can come from a relative, employer, close longtime friend, or a nonprofit. Freddie Mac also allows borrowers to use wedding gifts, so long as you provide a copy of your marriage license.
VA loans: The U.S. Department of Veterans Affairs (VA) guarantees home loans for eligible military borrowers. VA loans require no down payment, but VA guidelines allow borrowers to put gift funds toward closing costs or a down payment, if they so choose. The documentation rules are similar to those of FHA loans.
USDA loans: The U.S. Department of Agriculture (USDA) guarantees no down payment-mortgages to borrowers with low to moderate income in rural corners of the country. Like the VA loan program, gift money can be used to pay closing costs. Borrowers must provide a gift letter and supporting documents consistent with the gift letter rules of other loan programs.
Documenting a Down Payment Gift
Lenders require the borrowers to provide some detailed documentation any time a down payment gift is used. Specifically, the borrowers will need to produce a letter which includes the name of the donor, their relationship, the date and amount of the gift, and a statement that says the money has no expectation of repayment.
Both parties will need to sign the letter and the lender may also require additional documents. For FHA loans, borrowers will need to show copies of the donor’s bank statements to prove that they’re actually in a position to make a gift.
In Conclusion
If your family decides to help you out with a down payment gift, you as the recipient should be extremely grateful.
However, like any large financial move, there are some rules and regulations to consider. So please do reach out to me for more, as it would be my pleasure to help you structure your loan and down payment options.
