Saving for a down payment is often the largest hurdle first-time homebuyers face. Many assume they need 20 percent down (which isn’t true) or just don’t have enough for even the minimum down payment. Fortunately, many loan programs allow mortgage down payment gifts, but only if you follow the rules.
Rule #1 Gift Funds must Come from a Relative, Employer, or Charitable Organization
Each loan program/lender differs, but in general, your gift funds must come from a relative (blood or marriage), employer, or charitable organization. All loan programs agree that the funds can’t come from an interested party (someone involved in the sale or that benefits from it in any way).
Rule #2 The Funds Must not Require Repayment
Gift funds cannot come with the requirement that you repay them. That would affect your debt-to-income ratio and possibly your loan approval. Make sure the money you receive is a gift – talk to your donor about it, even though it’s an uncomfortable conversation – it’s necessary.
Rule #3 There must be a Gift Letter
Your lender will require a letter written from the donor proving the gift funds. The letter must have certain details in it for the lender to accept it:
- The donor’s name, address, and relationship to you
- The property address the gift is intended for
- The amount of the gift
- The date the donor provided the gift
- A statement explaining the funds are a gift and not a loan (no repayment is expected)
Each lender has its own rules, so always check with your lender to see if there are any other requirements the letter must meet.
Rule #4 You Must Document the Funds
Lenders need proof that you received the funds if they aren’t seasoned. This means if you receive the funds within 2 months of your mortgage application, you’ll need proof of receipt. This may include:
- Make a copy of the check written to you from the donor (it should be in the exact amount as described in the letter)
- Keep a copy of the deposit receipt, depositing the funds in the account you disclosed to the lender
- Provide a copy of your bank statements if you’ve already deposited the funds
- Proof of the wire transfer to the title company if the donor wired the funds
Rule #5 The Loan Program Rules
Each loan program has different down payment gift rules, including how much you may receive. Here’s a quick breakdown:
- Conventional loans – If you buy a 1-unit property, the entire down payment may be a gift. If you buy a 2-4 unit property, you must contribute at least 5 percent of the down payment from your funds.
- FHA loans – As long as you have at least a 619 credit score, the entire down payment may be a gift.
Gift funds help you buy a home sooner than you could on your own. If you have access to gift funds, talk to us about your options. You may have more mortgage options than you realized, giving you the chance to become a homeowner sooner than you thought.
