Down Payment Gift? Here’s What You Need to Know
Saving for a down payment can be one of the biggest barriers to homeownership. Help with a down payment in the form of a gift from a family member can put you ahead of the curve, but there are a few things you should know to avoid potential pitfalls later.
Cash from a relative may be used only for the purchase of a home you’ll live in, not for investment properties. Other rules vary slightly between conventional and FHA loans, and you’ll have to provide some extra information to your lender to ensure a smooth mortgage process.
The gift must have no strings attached.
A gift for a down payment must be genuinely that — a gift — with no expectation of repayment. The gift giver must provide your lender with a letter that documents the amount of the gift, their relationship to you, and specific wording denoting that they don’t expect you to pay the money back. During the underwriting process, your lender may also request bank statements from both parties to verify the transfer of funds.
There are restrictions on who can give.
With very few exceptions, a conventional mortgage allows for a gifted down payment only from a relative, which can include stepparents, in-laws, and extended family.
When it comes to FHA loans, the pool of acceptable donors expands to include close friends, employers and labor unions, charitable organizations, or government agencies that assist low-income and/or first-time homebuyers. Regardless of what type of loan you take out, there are some standard exclusions. Namely, you cannot accept a gift from anyone with a financial stake in the home sale, such as the sellers, agents, or broker (even if you’re related to them).
The gift amount may be limited.
For an FHA loan, there are no limits on what percentage of your down payment can come from gift funds. For a conventional loan, gift funds can make up the entire amount only if the down payment is 20 percent or more of the sales price. If you make a smaller down payment that requires Private Mortgage Insurance (PMI), a portion must come from your personal funds; the amount may vary by lender.
Open Mortgage can help you navigate these and other stipulations related to your gift. Contact us today.