If you’re going to buy a house, or at least you hope you’re going to, the down payment can be one of your biggest concerns.
Your down payment is a percentage of the purchase price of a property that comes out of pocket. Your down payment can range from as little as 3% up to 20% in most cases for a property you’re buying as a primary residence. The particular down payment required depends on the type of mortgage you’re using and the property type.
When you make a larger down payment, you may be able to buy a more expensive property or get a lower interest rate.
Often, first-time homebuyers may get gifts from family members to put toward their down payment, but there are stipulations.
Limitations of Using Gift Money
A mortgage lender will consider a few things, typically when you receive money as a gift for your down payment.
First, they’ll look at the amount of the gift. Lenders may also consider where the money came from and the relationship between you and whoever gave you the money. A lender might not let you use gift money for your down payment if you didn’t get it from someone close to you.
If you use money gifted to you, a lender will usually require you to provide a gift letter. The gift letter should indicate you don’t have to repay the loans. A lender may also make you show documentation proving the gift’s transfer to your bank account.
The lender may also go as far as asking the person who gave you the gift for a copy of their bank account statement or check to you.
Gifts and Conventional Loans
Conventional loans are financing options that aren’t guaranteed or insured by any government entity. You usually can use gift money for your down payment and closing costs, as long as it comes from a source considered acceptable.
Family members are an acceptable source of a gift. Family under these definitions can include parents, children, siblings and grandparents. In-laws and domestic partners may also be included.
The Federal Housing Administration offers FHA loans for borrowers who have low-to-moderate incomes. If you apply for this type of loan, the gift funds you receive must be from someone considered an eligible donor. There are typically stricter family guidelines even compared to conventional loans.
If you’re applying for an FHA loan, while family relationship guidelines are more stringent, there is an allowance for gifts from charitable organizations or your employer. You can also use funds that come from a public entity or government agency that assists first-time or low-to-moderate-income home buyers.
A VA loan means you have the option to make no down payment if you’re a service member or a veteran in certain circumstances. The major restriction on gifts for VA loans is that they can’t come from someone who’s described as an interested party.
An interested party has a role in the transaction, like the seller or a real estate agent.
Since, again, you don’t have to make a down payment on these loans, gifts are less relevant.
What Else to Know About Gifts
Usually there aren’t limitations on how much someone can give you toward your down payment. In some circumstances, you may have to pay at least some of the down payment from personal funds. This is usually the case if you’re buying an investment property.
If you receive money as a gift, your lender can provide you with a standard gift letter the person completes.