A sum of money as large a down payment may cause some homebuyers to put their entire life savings in their house, or worse, delay home ownership for years as they try to save enough to buy a home. However, there is a silver lining! Homebuyers are allowed to receive gifted funds to make all or some of their down payments, but there are important rules that need to be followed to qualify.
Who Can Provide a Gift?
While some loan programs only permit a blood relative to provide a down payment gift, other loan programs have a more expansive view on who a donor can be and allow gifts from a charitable organization or a non-blood relative. Let’s take a closer look:
Conventional loans: For a conventional loan, the gift must come from family, which means by blood, adoption, legal guardianship or marriage). Unfortunately, the rules for conventional loan down payment gifts do not permit for families fiancés and domestic partners.
FHA loans: FHA loans has a slightly different definition of the term “family”. FHA loans permit gifts from close friends that can include extended family including cousins, nieces, and nephews as well as labor unions, and charitable organizations.
USDA and VA loans: USDA and VA loans are the most relaxed when it comes to mortgage gifts. Anyone with a relationship to the purchaser can provide a down payment gift, BUT the gift giver cannot be an interested party, which is anyone involved in your home purchase transaction (the seller or your real estate agent).
Can the Gift Giver Put Any Conditions on the Gift?
No! The gift giver must be providing the gift with absolutely no expectation to be repaid. There’s a reason they call it a gift! Further, the gift giver cannot expect to receive any type of interest on the gift if it is repaid by the purchaser. If there is any agreement, written or oral, to pay back the funds, the lender will consider the money to be a loan rather than a gift, and it will be factored into the debt-to-income ratio calculation. It is important to be honest with your lender about whether the money you are receiving is a fit or a loan to make sure your loan stays in good standing, but more importantly, because lying about a down payment gift when it is actually a loan is considered mortgage fraud!
How Can a Purchaser Prove They Are Receiving a Gift?
Lenders will require the purchaser provide a gift letter from the gift giver in order to verify the gift. The letter should include as much information as possible regarding the gift, including the amount of the gift, that the gift is not expected to be repaid, the relationship between the gift giver and the purchaser and the address of the property being purchaser. The information required in the letter may vary from lender to lender, so it is important to find out exactly what information your lender requires.
It’s important to understand that down payments gifts are becoming more and more common as home prices continue to rise. In other words, if you need a down payment gift to buy a home, you are not alone! According to a recent study from the Consumer Finance Protection Bureau, 31% of young adult homebuyers aged 25-44 received down payment gifts from 2009-2016.
Speak to a licensed loan officer that is on your side to make sure there are no hiccups along the process. Every LendFriend Home Loans loan officer is an expert in down payment gift rules and always available to assist. LendFriend is here to help and answer questions you might have!
