Using Gift Money for a Down Payment
Especially for young first-time homebuyers, one of the biggest challenges is coming up with the money for a down payment. While it’s true that mortgages are available today that require as little as 3% to 5% down, putting less than 20% down will usually require that you pay for private mortgage insurance. That can cost anywhere from 0.5% to 2% (or more) of the mortgage amount, depending largely on your credit score. Plus, even coming up with a relatively small down payment, such as 5%, still equates to a lot of money. After all, 5% of a $300,000 home is $15,000.
It can be difficult to come up with that much money, especially if you want to maintain a healthy balance in an emergency fund, which is wise. What’s a potential homebuyer to do? One option may be to use gift money. According to Zillow, more than half of recent millennial homebuyers used a gift or loan from family or friends to cover at least a portion of their down payment. If you have a generous benefactor in your life, here’s how using gift money for a down payment works.
How it works
When you apply for a mortgage, your lender will begin an underwriting process to see if you qualify. They will confirm your employment, income, assets, outstanding loans, and more. If there have been any unusual deposits into your checking or savings account over the past 60 days, your lender will want an explanation. Typically, you will be allowed to use gift money to help cover your down payment, but there are rules that apply to that.
If the money was a gift, your lender will want a letter from the gift-giver stating that the money is, in fact, a gift and not a loan. The letter will need to state specifically that there is no expectation of repayment. (Some lenders provide letter templates, stating exactly what they want the gift-giver to acknowledge.) If it were a loan, that would be added to your debt-to-income ratio, which could have an important impact on whether you qualify for a loan, and if so, at what terms.
Source of gift
As for who can provide such gifts, different types of loans come with different rules. If you’re applying for a “conventional” loan (from Fannie Mae or Freddie Mac), the loan can only be from a family member, although that definition is broad enough to include an aunt or uncle and possibly your future in-laws. FHA loans allow gifts from employers, charitable organizations, government agencies that provide assistance to first-time low-income buyers, and even friends. VA loans are among the least restrictive but do not allow gifts from “interested parties,” such as the home’s seller or your Realtor.
Portion of down payment
How much of the down payment may consist of gift money depends on the type of loan, the size of the down payment, whether the home is a single- or multi-family home, whether you will use the home as your primary residence, and in cases where you are putting less than 20% down, the rules of the private mortgage insurance company involved in the purchase. If it’s an FHA loan, the entire amount can be gift money. Ultimately, while there are many rules and guidelines around the use of gift money for down payments, decisions about whether to provide a loan and at what terms are up to the lending organization. For more information about obtaining a low-interest mortgage from Christian Community Credit Union, click here.
Matt Bell is the author of four Biblical money management books published by NavPress. He speaks at churches and conferences throughout the country and writes the MattAboutMoney blog.
This article should not be considered legal, tax, or financial advice. You may wish to consult a tax or financial advisor about your individual financial situation.