FINANCIAL WELLNESS

4 min read

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Jun 2016

What You Need To Know About Down Payment Gifts

Let’s talk about your down payment. Your down payment reduces the amount you need to borrow. Typically, your down payment can range from 3% to 20% of your sales price, depending on your loan type. Sounds reasonable, but if you’re like me, saving money can be hard sometimes. So when you are trying to save for something big like buying your first home, friends and family may step in and try to help by offering you money for your down payment. Instead of getting birthday or wedding gifts, you get money. In fact, you hope for money.

As long as you show up with your down payment, it’s all good, right? Well, it depends on who gave you the money, how they gave you the money, and when they gave you the money. Unfortunately, if they hand you the cash on closing day, it’s going to create some issues with your closing.

All money related to your mortgage loan has to have a paper trail.

Your lender will ask for a gift letter from the person who gave you the money stating that they gave you, not lent you, the money. Then, the giver will also need to show where they got the money to give you. Some people may be hesitant to share this information with your loan officer. It’s kept confidential and only used to make sure that the gift you are receiving came from an acceptable source, like someone’s retirement fund, an investment, or from a savings or checking account.

If your down payment is a cash gift, there needs to be a record of the deposit into your bank account months before your closing.

If gift giver took out a loan to give you money, then your lender may not see it as a gift. A paper trail helps your lender make sure you (or anyone else) didn’t take out a loan for the down payment or that the person who gave you the money has any expectations of pay back later. A loan isn’t a gift and anything you have to pay back is a debt, therefore, it has to be included in your debt-to-income calculation. This could potentially change the kind of loan you get or the interest rate you qualify for.

Also, while your parents may not ask you to pay them back for the loan they took out, you may feel obligated to do so later and that may impact your ability to make mortgage payments. So with paper trails, chances of committing mortgage fraud and money laundering, by buying a house using someone else’s identity and credentials, are lessened. By following the rules, you help ease the process your loan officer goes through in documenting everything properly and keep everything in line with banking laws and regulations.

Who can gift down payment?

For conventional loans (backed by Fannie Mae or Freddie Mac), anyone related to you by blood or law can be a donor. This includes spouses and engaged couples. This does not include college roommates, best friend, or your boyfriend’s Aunt Carol from Connecticut. Also, it can’t be someone who has an interest in the transaction, like the builder or real estate agent. FHA allows non-family donors such as your employer, close friend, a charitable organization, or government agency offering down payment assistance. Talk to your loan officer about that one.

How much can be gifted?

According to smartasset.com, this depends on the kind of loan you are getting. A conventional loan allows all of your down payment to be gifted as long as the minimum borrower contribution is met based on the program, credit scores, etc. If you are getting a FHA loan, the percentage of how much can be gifted may depend on other aspects in your financial profile, so please make sure you talk to your loan officer about that. It’s not often that you use gift funds for VA or USDA (rural housing) loans as they have a 0% down payment option.

What documentation is needed?

In addition to the gift letter, the person who gave you money needs to provide a bank statement (or other account statement if retirement, etc.) showing the money in their account. Then, you need to provide a bank statement showing the money deposited into your account. The money still needs to be there at time of closing. You may be able to skip some of the documentation steps if the person giving you money is going to wire it directly from their account to the closing agent on the day of closing. Ask your loan officer and closing agent if that is an option.

What if you need help with your down payment and don’t have family or friends to help you? Down payment assistance programs still exist. Don’t let the lack of a down payment stop you from talking to a loan officer about a mortgage.

If you live in VA, NC, SC, FL, TN or GA, there are state programs to help you with your down payment. We can help you access these programs and talk to you about the requirements and your eligibility. As we become licensed in more states, there may be more assistance available for you. State bonds and/or grant programs have income limits.

Talk to your loan officer about loan types that do not require a down payment like VA or USDA. If you have some money saved, there are low down payment loans available as well through FHA.

Check with alumni associations or employee assistance programs to see if they have grant money or assistance available. It also doesn’t hurt to check with your builder if you are getting a brand-new built-from-scratch home or even with your real estate agent to see if they are aware of any new programs or assistance available. A Realtor® friend told me about a grant program that was coming months ahead of time because she had heard of it at a conference she attended.

If you have investments, retirement plans or a 401k, you may be able to liquidate or borrow from that to help with your down payment.

Be sure to talk to a tax advisor and your loan officer before moving any money around as there may be an impact on your taxes and/or your application, depending on when you decide to shift the funds around.

If you do not have a down payment right now and do not have any help, don’t be discouraged. Keep saving your money and keep your line of communication with your loan officer open so that they can tell you about new options as they come available.

Frequently Asked Questions

Chances are, if you're wondering about it, someone else has too. Here are answers to some of the questions we hear most often.

Can a family member give me money for a down payment?
In most cases, yes. Mortgage loan programs allow gift funds from family members to be used toward a down payment. For Conventional loans backed by Fannie Mae or Freddie Mac, eligible donors include anyone related to the borrower by blood or law, including spouses and engaged couples. FHA loans allow a broader range of donors including employers, close friends, charitable organizations, and government agencies offering down payment assistance. VA and USDA loans also allow gift funds, though these programs already offer zero down payment options, making gift funds less commonly needed for the down payment itself and more often applied toward closing costs.
What is a mortgage gift letter and what does it need to include?
A mortgage gift letter is a signed document from the person giving the gift funds stating that the money is a gift and not a loan (meaning repayment is not expected). The letter usually includes the donor’s name, address, and relationship to the borrower; the dollar amount of the gift; the date the funds were or will be transferred; a statement confirming no repayment is required; and the donor’s signature.
Who is allowed to gift money for a down payment?
Eligible gift donors vary by loan program. For Conventional loans, eligible donors are limited to people related to the borrower by blood or law, such as parents, siblings, grandparents, spouses, and domestic partners. Employers, friends, or parties with a financial interest in the transaction, such as the builder or real estate agent, aren’t eligible donors for Conventional loans. FHA loans allow a broader group of donors, including employers, close friends, labor unions, charitable organizations, and government agencies.
How much of my down payment can be a gift?
For Conventional loans, the entire down payment may be gifted if the minimum borrower contribution requirement is met based on the loan program, credit scores, and other factors. For FHA loans, the percentage that can be gifted may depend on additional aspects of the borrower’s financial profile. VA and USDA loans already offer zero down payment options, so gift funds are less commonly applied to the down payment on those programs, though they can be used toward closing costs.
What documentation is required for a down payment gift?
Down payment gift documentation usually includes a signed gift letter from the donor confirming the funds are a gift and not a loan, a bank statement or account statement from the donor showing the funds in their account prior to transfer, and a bank statement from the borrower showing the deposit of the gift funds into their account. The gift funds must be present in the borrower’s account at the time of closing.
Can gift funds be used for closing costs as well as the down payment?
Yes. Gift funds can generally be used for both the down payment and closing costs, subject to loan program guidelines. For loan programs with zero down payment options, such as VA and USDA loans, gift funds are most-commonly applied toward closing costs. The same documentation requirements apply, regardless of whether the gift is used for the down payment, closing costs, or both.
What if the person giving me the gift borrowed the money themselves?
If the donor borrowed the funds they’re providing, the lender may not treat them as a gift. Lenders require a paper trail to confirm that gift funds came from an acceptable source, such as a savings account, retirement fund, or investment account, and that the money isn’t borrowed. If the source of the funds raises questions, the underwriter may require additional documentation. Borrowed funds that must be repaid are considered debt and would need to be factored into the debt-to-income calculation, which could affect the loan type or interest rate you qualify for.
What if I don’t have family or friends who can give me gift funds?
If gift funds are not available to you, there are other options worth exploring. Down payment assistance programs offered by state housing finance agencies, local governments, and nonprofit organizations can help borrowers with limited savings. VA and USDA loans offer zero down payment options for qualifying borrowers. FHA loans require as little as 3.5% down. Some borrowers may also be able to use funds from a 401k or retirement account toward a down payment, though this can have tax implications and should be discussed with a tax advisor and your Mortgage Banker before moving any funds.

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The views and statements expressed are deemed reliable as of the publish date indicated and may not be accurate or reliable at any future date. The views and statements provided are those of the author. Discussions regarding any financial information provided are not intended as individual recommendations and do not reflect the views or advice of Atlantic Bay Mortgage Group, L.L.C. The views expressed are subject to change at any time in response to changing circumstances in the market. *For refinances, the total finance charges may be higher over the life of the loan. Atlantic Bay Mortgage Group, L.L.C. disclaims any obligation to publicly update or revise any views expressed or information given. Loan programs may change at any time with or without notice. Information deemed reliable but not guaranteed. All loans subject to income verification, credit approval and property appraisal. Not a commitment to lend. Atlantic Bay Mortgage Group, L.L.C. NMLS #72043 (nmlsconsumeraccess.org) is an Equal Housing Lender. Located at 600 Lynnhaven Parkway Suite 100 Virginia Beach, VA 23452.