If you’re struggling to pool enough cash for your down payment, a generous relative or friend can help by giving you money.
But the money must be a true gift, not a disguised loan, and it must be documented properly through financial statements and a gift letter. If the gift is really a loan that you have to pay back, lenders won’t accept it.
Here’s what you need to know about applying gift funds toward a down payment.
Who can donate
Loans insured by the Federal Housing Administration allow for family, friends, your employer or others to give you money as a gift for the down payment. The FHA is “not concerned” with where your gift comes from, according to the Department of Housing and Urban Development, as long as it’s not from someone who has a stake in the home sale.
The donor can’t be someone who has a financial interest in the sale of the property, such as the seller, your real estate agent or your broker.
Your donor is responsible for paying taxes on the gift if it exceeds the exemption limit in a single year. The limit for 2017 is $14,000, according to the IRS.
With FHA loans, the entire down payment can come from a gift.
There are no limits to the amount you can receive as a gift, according to Fannie Mae. If you’re putting down 20% or more on a loan that’s backed by Fannie Mae or Freddie Mac, it can all come from a gift.
However, if your down payment is less than 20%, some of it has to be your own money. The exact amount depends on the private mortgage insurance company that you’re purchasing insurance from, says Michele Reen, a mortgage loan originator with American Pacific Mortgage in San Jose, California.
The home has to be your primary residence or a second home, according to Fannie Mae. Gift funds can’t go toward the down payment on investment properties.
Gift funds can go toward other costs associated with your mortgage, including closing costs and, if your loan requires it, reserves, or money left over after the loan closes.
The gift letter
Your donor must provide a gift letter that includes the following information:
- Borrower’s name
- Donor’s name, address and phone number
- Donor’s relationship to the borrower
- Gift amount
- A statement that the borrower isn’t expected to pay back the gift
- A statement that the donor has no interest in the sale of the property
- Property address
- Borrower’s and donor’s signature
Here’s a sample gift letter:
Other required documents
The lender will require a paper trail documenting the transfer of money from the donor’s bank account into yours, or into an escrow account. You’ll also need copies of your recent bank statements, your donor’s recent bank statements and cashier’s checks or gift fund wires.
Some loan programs require documentation of the money leaving the donor’s bank account.
More down payment help
Keep in mind that if you put down less than 20%, you’ll have to pay private mortgage insurance in most cases, unless you’re getting a Veterans Affairs loan.
Check out first-time home buyer programs in your state, which may provide down payment assistance in the form of grants or loans.
If you’re seeking online assistance, such as crowdfunding, consider doing it more than two months before you apply for a mortgage since lenders look at only the past two months of your bank statements.
Michael Burge is a staff writer at NerdWallet, a personal finance website. Email: [email protected].