Gift money is a cash donation (usually from a close relative) that you can use for your down payment, closing costs, and other fees. However, there are rules and requirements to keep in mind when using gift money during the loan process.
In this article, we’ll cover everything you need to know about using gift money for a down payment – because if done right, it could make your home-buying experience significantly easier.
Saving money for a down payment isn’t easy – especially if you’re a first-time homebuyer. A common misconception is that you need 16 to 20 percent for a down payment; in reality, however, the average down payment for first-time buyers ranges between six and seven percent. Even then, a six percent down payment on a $350,000 house, which is $21,000, isn’t a small amount.
This is why gift money for a down payment can be a lifesaver for buyers who don’t have the cash ready to buy a home. In fact, 28 percent of younger millennials used gift money from a relative or close friend to purchase their home in 2021.
Most conventional mortgage lenders allow buyers to use gift money for a down payment. However, this money must come from an acceptable source and lenders require recipients to disclose the source of these funds.
When you use gift funds, your lender may require you to provide a gift letter. A gift letter for a down payment is a written statement explaining who is gifting the money, where the funds are coming from, and what the relationship is between the donor and recipient.
A gift letter must include the following:
If you need to provide additional information with your gift letter, your lender will let you know what you need.
Are you planning to use gift money for a down payment? Find a Total Mortgage branch near you and speak to a mortgage advisor today.
There aren’t too many rules for using gift money for a down payment, but lenders will be less likely to allow gift money if it doesn’t come from a family member (parent, grandparent, sibling, etc.).
You may also be asked to provide a paper trail to prove that the transfer of the gift money happened. To verify the availability and transfer of funds, you may be asked to provide one of the following:
You must also prove that this money isn’t a loan that must be repaid. Gift money from a loan could affect your ability to repay your mortgage, meaning the lender would take a greater risk by giving you a mortgage.
Another important rule is that gift funds cannot come from anyone with a stake in the transaction. This would include a real estate agent, seller, broker, or other interested parties.
These same rules apply no matter the type of mortgage, such as a conventional mortgage, FHA, VA, or USDA loan.
However, conforming loans backed by Fannie Mae and Freddie Mac require that gift funds for home purchases come from a family member of the borrower. Fannie Mae and Freddie Mac define family as:
Government-backed loans, on the other hand, aren’t as strict. Gift money for a down payment can come from a close friend, family member, charitable organization, employer, labor union, or government agency.
There’s no limit on the amount of money you can put down using gift funds. However, you may be required to pay a portion of your down payment from your own personal funds depending on your property type and the amount being put down.
For example, if you’re buying a second home or a multi-unit property, you may be required to contribute at least five percent of your personal funds if your down payment is under 20 percent.
After this minimum contribution, gift money can be used for the remainder of the down payment. If you’re purchasing an investment property, your down payment must come entirely from your own funds.
One of the most significant advantages of gift money is that it allows you to make a bigger down payment. However, you must meet your lender’s requirements regarding who is gifting you the money, where the funds are coming from, and your relationship with the donor. Make sure you keep all records of the transaction to show your lender.
Mortgage shopping? Be sure to explore Total Mortgage’s loan options when you’re ready to purchase a home. If you have any questions about your mortgage options, schedule a meeting with a local mortgage expert or apply online for a free rate quote.