The 2019 Profile of Home Buyers and Sellers, a new report from the National Association of Realtors®, shows that one-third of first-time buyers in 2018 used help from family or friends for their down payment last year. The other two-thirds didn’t even know you could use gift funds for a down payment. OK, that second part is made up…but it’s probably not far from the truth.
The reality is that dedicated down payment assistance funds often go unused and many of those who might like to buy a home don’t even consider it because they don’t have enough money saved for the down payment and don’t know there are easy—and free—ways to come up with one, like the aforementioned gift funds, as well as grants and forgivable loans. We’ve got the details on how and where to get the help.
A down payment grant provides buyers with funds that never have to be repaid. Programs vary from state to state, but are generally earmarked for first-time buyers in low- to moderate-income brackets. Several states have local and regional programs, and there are also special grants for veterans, teachers, and first responders.
For instance, in Texas, My First Texas Home offers 30-year loans with competitive interest rates plus down payment and closing cost assistance that equals up to five percent of the mortgage loan. The Homes for Texas Heroes Program provides teachers, police and correctional officers, firefighters and EMS personnel, and veterans with 30-year fixed rate mortgages and down payment assistance from 3–5 percent of the loan amount.
Grant programs also have different requirements in terms of income limits, credit scores, maximum home price, and maximum debt-to-income (DTI) ratio, so be sure to ask your lender to help you narrow down which options are best for you. If you’re looking for a grant in your state, start here.
Loans for down payment help also come in a variety of forms. Zero-interest, forgivable loans “are forgiven over a certain period, such as five years,” said NerdWallet. “The money doesn’t have to be repaid as long as the borrower still owns and lives in the home after the period is over.” Zero-interest, deferred-payment loans generally allow the borrower to make use of the funds without having to repay them “until the home is sold, the mortgage is refinanced or the mortgage reaches the end of the term.” There are also low-interest loans for periods of, say, 10 years, that can “make homeownership more attainable by spreading the down payment and closing costs over multiple years.”
Gift funds from loved ones
With many types of mortgage loans, you can depend on the kindness of friends and family for your down payment. There are strict guidelines for gift funds, with limits on how to gift and how much can be gifted. It’s also important to remember that the gifter may have tax consequences depending on the size of the down payment funds.
Regardless of the size of the gift, a mortgage gift letter will be required from the donor. This is a form “declaring that the down payment funds have been given to you as a gift,” said MSN. “It shows a mortgage lender that you're under no obligation to return the money. The gift letter may allow the donor to avoid paying a hefty federal gift tax on the transfer. Without the letter, the IRS could tax the donor for up to 40% on the gift amount.” A lender may also require the donor “to provide a bank statement to show that the person had cash to give you for your down payment.”