PHH Home Loans Blog

Making Your Down Payment With Gift Money

April 10th, 2017

To take advantage of low interest rates while home prices climb higher and higher, some homebuyers need help accumulating enough money for a down-payment. To satisfy secondary market loan package purchasers such as Fannie Mae and Freddie Mac and insurers like the Federal Housing Authority, lenders have strict rules about where down-payment money originates.

Lenders prefer that borrowers supply their own down-payment funds. It shows they have “skin in the game” and that they are good with money and can meet their financial goals. However, many homebuyers are turning to their parents, grandparents and other family or friends for help.

Research in from loanDepot LLC, found that more parents are planning on helping their Millennial-age kids buy homes. In the last five years, 13 percent of parents pitched in with down payments, covering closing costs, or co-signing the loan but lenders anticipate that fully 17 percent of parents will help their kids.

Because gifts are a gray area, lenders are requiring more documentation for down payment monies. For example, a parent may provide a few thousand dollars to an adult child to use as a down payment — but is the money a gift or a loan? Lenders may require borrowers and gift-givers to provide a certified down-payment gift letter or to sign an affidavit.

Such affidavits must include:

  • The amount of the gift, accompanied by a corresponding cashier’s check
  • The name and address of the gift-giver and relationship the gift-giver has to the homebuyer
  • The purpose of the gift — to be used only as a down payment on the subject property, complete with the property’s address
  • A statement confirming that the gift is not a loan, and does not need to be repaid
  • Signatures of the borrower and the gift-giver

Because lenders require a paper trail, allowing parents to simply transfer money into the borrower’s account to mix with the borrower’s funds is discouraged. First, a large deposit raises the borrower’s income and alters the bank statements, possibly allowing a borrower to qualify for a home that in reality is too expensive. And don’t think underwriters won’t find it. One of the first things they do is examine your bank accounts.

If you want to get a conventional loan, Quicken Loans advises the following:

  • If you put down 20% or more, it can all be from a gift.
  • If you put down less than 20%, part of the money can be a gift; how much varies by loan type.
  • You can only use gift money on primary residences and second homes.

For FHA and VA loans, all of your down payment can be gift money. If your credit score is between 580 and 619, at least 3.5% of your down payment must be your own money. You can only use gift money on primary residences.

If you’re planning to use gift money as part or all of your down payment, ask your lender how to meet the appropriate requirements.

Written by Realty Times Staff

This is not a commitment to lend. Loan programs, rates and terms subject to change without notice and are subject to property and credit approval. For informational purposes only. Restrictions may apply. Your real estate professional is not a mortgage lender. Please contact your Loan Officer for information about mortgage products and your eligibility for home financing. PHH Home Loans, LLC, 1 Mortgage Way, 3rd Floor, Mt. Laurel, NJ 08054. NMLS ID # 4256 (www.nmlsconsumeraccess.org). Arizona Residential Mortgage Licensee #BK 0907270; Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act; Illinois Residential Mortgage Licensee #MB.6759865; 100 W. Randolph, 9th floor, Chicago, IL 60601, 800-532-8785; Minnesota - This is not an offer to enter an interest rate lock-in agreement; Missouri in state office located at 2458 Old Dorset Road, Maryland Heights, MO; Ohio Certificate of Registration MB.804019. Equal Housing Lender.
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