Buying a home is exciting, but coming up with enough money for the down payment can be a hurdle for some borrowers. That’s where help from family or friends can make the dream of homeownership a reality. If you’re planning to use gifted funds to help with your down payment, here are some important rules to keep in mind.
Mortgage lenders want a clear representation of your financial profile, which means they want to know where your down payment came from. Why? To make sure borrowers can afford their monthly payments without any hidden debts. They also want to confirm that the gift isn’t actually a loan that adds a heavier burden.
Small gifts, like a birthday check, usually don’t raise questions. But if the amount is significant (like more than half your monthly income) it’s important to know what the guidelines are so you can provide the necessary documentation.
No matter the loan type, utilizing gift funds to help with your down payment or closing costs would require a signed gift letter stating the amount, the donor’s contact information and relationship to the borrower. The purpose of the letter is to clarify that repayment isn’t expected, and that the funds being given to the borrower are a bonafide gift. The donor would also need to provide proof of funds to show they can provide the gift, and evidence of the transfer for transparency.
Conventional Loans
For conventional loans, gift funds can cover part or all of your down payment and closing costs. However, a few restrictions apply. Gift funds must come from an eligible donor, such as anyone related to you, a friend or a partner. They can’t be used for investment properties.
FHA Loans
FHA loans are designed to help first-time homebuyers, with down payments for loans being as low as 3.5%. These loans allow gift funds for down payments and closing costs. They accept a broader range of donors such as family members and close friends, employers or labor unions, charitable organizations and even government agencies that offer homeownership assistance.
As with conventional loans, the gift must not require a repayment and must be properly documented.
Jumbo and Non-QM Loans
Gift funds can also be used for Jumbo (typically used for higher-priced homes) and Non-QM Loans (for borrowers who don’t meet traditional mortgage guidelines). However, there’s an important caveat: At least a portion of the down payment must come from the borrower’s own funds. This ensures the borrower has a financial stake in the purchase.
Why This Matters
Gift funds are common in today’s housing market. In fact, nearly 4 in 10 homebuyers who financed their purchase in 2023 used gifts from family or friends, according to Zillow’s Consumer Housing Trends Report. If you’re planning to use gift funds for your own down payment, talk to one of our Home Loan Experts to get more information. A little preparation can help you avoid delays and keep your homebuying journey on track.
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