Coming up with a down payment for a house is often a worry for want-to-be homeowners. Depending on the type of home loan you intend on applying for, you would need either 3.5 to 5 percent of the purchase price, or the standard 20 percent of the purchase price. So where does that money come from? For most people, it comes from years of savings and hard work, and if you are fortunate enough, a portion might come from gift funds. Perhaps the money was given to you as a wedding gift, or maybe from your parents to help you get started as you head out on your own. Regardless of where the gift funds came from, there are guidelines and procedures that must be followed if you’re using gift funds for a down payment.
As you begin the process of trying to get approved for a loan, the underwriter will examine your assets closely and make sure the money you are using is in fact your own.
If you received funds from a family member to use as a down payment, a gift letter will be required. The letter will have to include the givers contact information (such as name, address, phone number), relationship to you, amount of the gift, date the money was gifted, property address that is being purchased, a declaration indicating that the money is not expected to be given back, and a signature from both the giver and the purchaser.
When you actually received the gift funds is also a critical factor. Most lenders need a paper trial of all money in your accounts for the 60-90 days prior to purchase. Check with your lender to determine their guidelines.
The amount gifted is a factor, which varies depending on the type of loan. Below are some guidelines to follow, but always have this discussion directly with your lender.
- Conventional Loans: 100 percent of your down payment can be in the form of gift funds IF you are putting down at least the standard 20 percent of the purchase price. If you are putting down less than 20 percent, only a portion is allowed to come from gift funds.
- FHA/VA Loans: If your credit score is 620 or higher, all of your down payment can be gifted.
Keep in mind that gift funds are only allowed when you are purchasing your primary or second home.
Whom are you allowed to accept gift funds from? This list is generally comprised of two categories.
- Relatives or a person with a close personal relationship to the purchaser
- A non-profit group, labor union, or government agency formed to assist home buyers or provide financial support
As with all parts of the home-buying process, there are exceptions, roadblocks, and a variety of scenarios that could take place at any given time. It is important to work closely with your lender and discuss the type of loan that will work best for you and your particular circumstances. If you are planning to use gift funds, discuss this with your lender and determine their guidelines and exactly what is expected from you and the person giving the funds. This way, you are prepared and cognizant of the lender’s expectations and have time to prepare all necessary paperwork.