Saving for a down payment can be one of the most important and most challenging facets of buying a home. The larger the down payment, the lower your loan amount – and that results in a lower monthly payment, a lower interest rate in many cases, and it could help you to avoid mortgage insurance.
But, there are some out there that can get around bringing in a large down payment. Many have family members or others who are willing to help them out – and that’s when “gifting” comes into play.
The Gift Letter
Borrowers can get help from parents or other people that care about them, but they will need to get a signed statement from that giver that the money is, in fact, a gift and not a third-party loan.
The mortgage gift letter must include the giver’s name, address and contact information, as well as the banking information of that particular account, as well as the recipient’s name and relationships to the giver and the dollar amount.
In most cases the lender will have a template letter that will help you with this step.
A Key Piece – Documenting the Gift
When putting together the gift letter, the giver needs to include documentation of where that gift is coming from – this is extremely important
For instance, the lender will most likely need to see a bank statement or other form of proof verifying that the donor has the money to provide that gift and/or paperwork showing an electronic transfer between the donor’s account and yours.
If the person gifting the funds is selling shares of stock or other investments to provide the cash for a down payment, the giver will need a statement from their brokerage account showing that transaction.
Most importantly, as a borrower, you don’t want to add the gift funds with any of your other finances. Doing so could complicate the paper trail and cause the lender to reject the gift altogether.
It’s easiest to have the giver wire the money straight to escrow at closing – that way there are no issues with documenting the gift.
Rules and Limits On Gifts
You might assume that you can just use whatever financial gifts your loved ones give you for a down payment, but using gift money is not as simple as you might think. The source of the funds in your bank account, and the givers, will matter just as much as how much money you actually have.
Secondly, the amount of down payment funds that can be gifted depends on the type of mortgage loan involved. If you’re getting an FHA loan with a 3.5% down payment, for instance, the entire down payment can be a gift.
On the other hand, if you’re using a conventional Fannie Mae or Freddie Mac loan, the entire down payment can only be a gift if you’re putting down 20% or more of the home’s purchase price. If your down payment is less than 20%, some of the money has to come from the borrower.
These rules are subject to change based on lending regulations, so check with your mortgage lender to make sure that you transaction qualifies for the use of gift funds.
If a borrower is purchasing a primary residence, they can use gift funds for their down payment. These following regulations apply:
- If it’s a single-family home, you can use gift funds without having to contribute any of your own money to your down payment.
- If it’s a multi-family home, you can get a home without having to contribute to the down payment as long as the down payment is 20% or more. If the down payment is 20% or less on a multi-unit home, you have to contribute at least 5% of your own funds to your down payment.
For a second home purchase, the following regulations apply regarding gifts and gift limits:
- If you’re making a down payment of 20% or more, all funding for the down payment can come from the gift.
- If it’s less than 20%, then 5% of your down payment must come from your own funds.
Gift funds cannot be used toward the down payment on any investment property.
Who Can Gift a Down Payment?
Depending on the type of loan, there are different regulations on who may give a down payment gift.
Conventional Loans (Fannie Mae/Freddie Mac)
A conventional loan through Fannie Mae or Freddie Mac means the gift must to come from a family member. Per their regulations, family is defined as:
- Parent (including step and foster)
- Grandparent (including great, step and foster)
- Aunt/uncle (including great and step)
- Niece/nephew (including step)
- Cousin (including step and adopted)
- In-laws (including parents, grandparents, aunt/uncle, brother- and sister-in-law)
- Child (including step, foster and adopted)
- Sibling (including step, foster and adopted)
- Domestic partner
With FHA loans, the list is nearly identical to the conventional rules, including future in-laws. But, some restrictions do apply – so do check with your lender for details.
While cousins, nieces and nephews aren’t able to give your gift under normal family guidelines with an FHA loan, the FHA does allow for gifts from close friends who have a clear interest in your life. This can include extended family like cousins, nieces and nephews and even former spouses.
In addition to the ‘close friend’ guideline, the FHA also allows for gifts from the following:
- Labor union
- Charitable organization
Finally, you can receive funds from a government agency or public entity that provides homeownership assistance to low-to-moderate income or first-time home buyers.
Please reach out to me for more information on gifts and mortgage qualification, as it would be my pleasure to help you!