How to Use a Gift for a Down Payment on Your Mortgage

If you’re looking to purchase a home, you probably already know that there is generally a down payment required before you can move forward with the buying process. You probably also know that there is a specific percentage of the overall amount of the loan the lender needs to receive for the down payment. What you may not know, though, is that there can be rules about where that money comes from. Different lenders and guarantors have their own criteria, but watch out for these restrictions:

Gift status
If mom and dad want to help out by making up the difference between what you have saved and the total down payment required, be grateful. But also understand that this money normally needs to be given as a gift and not as a loan. It’s understandable that lenders wouldn’t look kindly upon potential borrowers who need to take out a loan to qualify for a loan.

Source of gift
Lenders tend to raise an eyebrow and lower the big red “denied” stamp on you if a gift you have received is from a friend or associate. The reason is that they see it as far less likely that the money you have received is actually a gift. It’s more likely–at least in the lender’s eyes–that this person is lending you the cash. You will be much better off getting money from a direct family member.

Paper trail
Documentation—like a copy of a check or money order—makes lenders feel warm and fuzzy. If suddenly a large cash deposit comes out of nowhere and ends up in the account from which your down payment will come, your lender can be spooked and think something fishy is going on. Even better than just a copy of the transaction is to get a “gift letter” from the person who has given you money for a down payment that stipulates the money is not expected to be repaid. The letter should also contain the total amount of the gift and the source of the gift to show the giver’s ability to simply turn over a large amount of cash without ever getting it back.

Size of gift
Some lenders restrict the percentage of your down payment that can be gifted. For example, they may require that at least 25% of the down payment amount come from your own account. As with each of these criteria, it is important to ask your lender what their particular policy is.

You may be asking yourself: What about funds that were given a while ago? Generally, if you have had gifted money in your own account for more than three months (though some lenders will do 1 or 2 months), it is considered “seasoned.” In that case you generally don’t need to provide the documentation listed above and a lender or guarantor is much less likely to question the source of the funds.

The moral of the story? If you need a little help with your down payment, it helps to plan ahead. However, if you have a shorter timeframe, you can sail through the down payment process by taking just a few key steps.

Revised January 2016

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