It sure would be nice to receive a house as a gift, wrapped in a pretty bow. But for most of us, the the home-buying process starts with finding enough cash for a down payment. That can be challenging, especially since many lenders require at least 5% down. You might be able to get a FHA loan with a lower 3.5% down payment, but that’s still not a small amount of change. Consider: a 3.5% down payment on a $200,000 home is $7,000. That’s a lot of money to come up with, especially if you are trying to buy during a time of economic hardship.
The good news is that you don’t have to come up with all the money for a down payment on your own; you can use gift money from someone else to help augment your down payment funds.
Rules regarding down payment gifts
Using a gift for a down payment is one of several ways that friends or family might be able to help you with buying a house. While getting approval to use a gift for a portion of your down payment isn’t overly difficult, it is still more complicated than you might expect. There are rules governing how a cash gift for a down payment works, and you will need to be prepared to follow them. Some of the rules associated with down payment gifts include:
- It can’t be a loan: The cash gift has to be a true gift. It cannot be a loan that you are expected to pay back.
- It usually has to come from a close relative: In order to increase the chances that your down payment gift is a true gift, many lenders require that the money come from a close relative. This can be a parent, grandparent or sibling. A truly close friend or an employer may also be approved to provide the gift.
- Documentation: Many lenders require that the entire transaction be documented. Givers usually have to provide the recipient with the funds in the form of a cashier’s check or a personal check that can be tracked. Receipts of each withdrawal and deposit on the part of all must be documented. FHA loans are particularly strict about down payment gift documentation.
- You might need to put in some of your own money: If you are getting a FHA loan, the gift can cover the entire amount of the down payment. However, if you are getting a conventional loan, the mortgage lender may require that a certain percentage of the down payment be provided by your own funds. This is to ensure that you are truly vested in the transaction, risking some of your own money.
In some cases, you might also be asked to provide a gift letter. A gift letter documents the amount provided for a gift, as well as certification by all involved that the money given for the down payment is a true gift, and not to be repaid. It must be specific about the amount of the gift, and signed by all parties. (Those on the gifting side of the arrangement, can give up to $13,000 a year to an individual without having to pay the gift tax.)
Before you receive a down payment gift to aid in your home purchase, find out from your mortgage broker or lender what the requirements are for a down payment gift. It’s a good idea to clarify the details early on in the process in case additional documentation is required due to tighter lending and underwriting requirements these days. Make sure that you and your donor can meet these requirements before you get too far into the process of receiving the gift.
Photo: Howard Dickins, via Creative Commons 2.0