Gifted Down Payments 101

In the long run, buying a home can often be cheaper than renting.  But until you see the payoff, your wallet may feel some pain. And it all starts with the down payment. (Plus, to avoid private mortgage insurance on a conventional loan, you’ll need to put 20% of the purchase price down on a home.)  Sound unmanageable? If you’re lucky enough to have a family member who wants to help out you can use gifted money for your down payment. But there are some rules you need to follow to have your gifted down payment approved.

Who Can Donate?

A gifted down payment can’t come from just anywhere.  The donor of a gift used for a down payment on a home must be a blood relative, and not a party who might be interested in closing the transaction.  In some cases you can also receive a gifted down payment from a spouse or fiance (or fiancee), but don’t count on getting a loan from a family friend and still getting approved.  Lenders will look to verify the relationship and also to confirm that the funds are indeed a gift, and not a loan.

Verification Letter

If your down payment was a gift, you will have more paperwork than other applicants. A lender will require a letter from the donor before it can finalize and approve your loan.  Gift funds require a letter from the donor of the funds stating name of the donor, the amount, and the date.  The letter should also contain a statement confirming that the funds do not require repayment.  The letter can be sent directly from your family member to your lender, or given to you to give to your lender.

Proving the Source

Once the lender receives proof that the down payment was indeed a gift, you’ll also need to prove that the donor gave you the funds. If you’re applying for a conventional mortgage, you’ll need to provide your bank statement showing the funds in your account. The donor will need to supply the canceled check, according to Weaver. If you applied for a Federal Housing Administration loan, both you and the donor will need to supply copies of your bank statements showing the transaction.  If the donor didn’t write a paper check, don’t fret.  For FHA loans,  bank statements are required from both parties showing incoming and outgoing funds.  For conventional loans, the borrower’s bank statement and the wire transfer confirmation page from the donor are needed.

Letting the Money Age

Some home buyers choose to ask for the gifted down payment early and wait to apply for a mortgage, letting the money “age” in their account. While this will work in theory, as most lenders go back only 60 days when looking into your bank statements, there really is no reason to do so.  Borrowers should keep in mind that gifts are permissible and create no material difference when applying and obtaining mortgage financing.