First Time Homebuyer Information & Education

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Down Payment Loans and Gifts

Down Payment Loans and Gifts - Down Payment Loans and Gifts

Loans and gifts can help with your down payment but you can not use this strategy for all loan programs. The most popular program for this tactic is the Federal Housing Administration or FHA. FHA allows 100% gift funds for your down payment. The gift can be from any relative or can be collected through new innovative programs, like the Bridal Registry where couples receive money into an account that can be used for the down payment.

Another popular tactic, which can be used in a wider range of programs, is to borrow from your 401K program. If you have a 401K program with your employer, you can withdraw without a penalty for your down payment and pay it back over a specified period. There are some drawbacks, the payment will be used in qualifying and your 401K account will not continue to grow as fast. Even with these drawbacks, it is often a smart move if this is your only option.

Gift programs are available to first-time homebuyers, low- and moderate-income individuals and families who wish to achieve homeownership.

For any gift funds used toward downpayment, you must provide documentation that the funds are indeed a gift and not a loan that must be repaid. Your loan officer can help you with this.

There is even a gift program that allows people to sponsor a CD for you. The benefit with this program is that the person making the deposit will retain their money, and gain interest on the investment. Talk to your mortgage professional about this program.

Any time money is obtained from a loan for a down payment this new loan needs to be calculated into your debt to income ratio. This applies to any loan whether it is borrowing against your own 401k, a personal loan, or a home equity line of credit on another property.

Often a lender will only allow a percentage of the down payment to come in the form of a gift. Depending on the lender it can be as low as 5%.

Down Payment with Gift Letter - If you are a first time home buyer who has been out shopping for that dream house, you’ve probably already heard your real estate agent or property developer’s first question: “How much will you be putting down?” If you have excellent credit, several years of consistent income on record and a relatively long history of using credit wisely, you may qualify for 100% financing, often referred to as a “No Money Down Mortgage” or “Zero Down Home Loan”. But for the majority of new borrowers, a down payment is a prerequisite to buying a house, and finding 20% to 30% or more of the purchase price of a house can very often entail getting the money from family or friends. Getting that much money together can be tricky enough, however lenders will also require that every dollar used for a down payment be documented back to a specific funding source, and this can be particularly difficult when the money comes from a third party, which is why we have “Gift Letters”.

Newlyweds and young people generally have neither sufficient credit history nor income consistency to qualify for 100% financing, and are also the least likely to have sufficient savings and acceptable documentable assets to actually come up with the cash to make the down payment.

Members of the family are in some ways the best and very often the only available source of down payment assistance available to “green” borrowers. Your lender generally will only allow you to use money given to you by a true family member, i.e. your mother, father, brother, sister, uncle, aunt, grandfather, grandmother, first cousin, etc.

This means that in most cases you cannot use funds given to you by people who are really not family members, for example your friends or colleagues. However you may be able to use funds from a non-family third party if you can provide documentation of a very close and long lasting relationship. This is done primarily to prevent people from taking out personal loans which will have to be repaid to come up with their down payment, which have the potential to throw off the person’s debt to income ratio, or DTI. Basically, they don’t want you to take on more debt than they believe you can safely repay, otherwise they would have qualified you for 100% financing.

If you find yourself in a situation where you need to get money from your folks or other family to make a down payment on your new house, you will be required to prove that you did not borrow the money from them with an expectation on their part that it be repaid or with an intention on your part to repay it. In fact, both you and your family will need to prove to your lender that the money was given to you, in the form of a Gift. To verify that the funds are in fact given freely, your lender will require special documentation.

If you are applying for a new mortgage, you should receive as part of your loan application package a special form called a “Gift Letter”. The goal of this letter is to identify the source of the funds and assure the lender that they are in fact a gift.

Typically, a gift letter will include the name of donor, the name of the recipient, the relationship between the two parties, the amount of the gift, the address of the property for which the gift is to be used to pay for, the fact that no repayment is required or expected, and an assurance that the person making the gift or the source of funds is not in nay way party or beneficiary to the transaction, e.g. not the broker, seller, agent, loan officer, builder and so on. In most cases the person giving the gift will be required to document where the money came from, such as a bank account or a brokerage account.

If you are depositing the funds directly into escrow, or even if they are going into your bank account, take some precautions to document the transfer by keeping copies of the checks or deposit tickets/receipts from the bank/escrow agent.

 

Information listed above is to be used for educational purposes only and is not guaranteed

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