Saving for a down payment can be a particularly challenging part of the homebuying process, but luckily, you’ll get by with a little help from your friends, or family, or labor union.
According to a study done by the National Associate of Realtors, gifts from relatives or friends are the third most popular source of down payment, and for good reason. They’re relatively easy to give and receive, may unlock benefits like lower interest rates, and shave years off the homebuyer’s timeline. Here’s how you may be able to use gift money for your down payment.
Unfortunately, you can’t accept a gift from just anybody and not all loan programs allow for your down payment to come from gift funds. For example, the HUD handbook makes clear that Federal Housing Administration (FHA) loans allow for gifts only from relatives, employers or labor unions, close friends with a clearly defined and documented interest in the borrower, charitable organizations or certain governmental agencies. Fannie Mae requirements differ slightly and limit the use of gift funds toward your down payment to those given by your fiancé/fiancée, domestic partner, relative (defined as your spouse, child, or other dependent, or any other individual who is related to you by blood, marriage, adoption, or legal guardianship). Also keep in mind that under the terms of the Fannie Mae loan programs, you can’t use gifts from anyone with a financial interest in the sale of the property, such as the seller, agent, builder or associated entity for your down payment.
Determine gift amount eligibility
While there may be no limitations on the amount a donor can contribute, a portion of the down payment may need to come out of your own pocket for certain loan programs. That portion can depend on the loan type, property, credit score, down payment size and more. These rules and regulations are subject to change, so you may want to consult a mortgage professional for the most up-to-date information tailored to your unique situation.
Have your gift giver Write a gift letter
Once you’ve cleared your gift giver as an eligible down payment source and you and your gift giver have decided on an amount, have your gift giver begin drafting a gift letter. This document must include:
- Your name
- Gift giver’s name, address and contact information
- Gift amount
- A statement that the money is a gift, and that you are not expected to reimburse the gift giver
- A statement that the gift giver has no interest in the sale of the property
- The property address of the home you are buying
- The gift giver’s signature
Establish a paper trail
Finally, thoroughly document the gift money transfer. This may include bank statements, canceled checks or printed paperwork detailing an electronic transfer from the gift giver to you. Confirm that your loan program doesn’t require additional proof of receipt.
This may be a good time to draft up a heartfelt thank you note, too!