The down payment is often the largest hurdle for new homebuyers. If you are one of them, don’t think you are out of luck. There is a way that you can get help with your down payment. You may be eligible to receive gift funds from certain people in your life.
Before you go and accept gift funds for your down payment from just anyone, though, you have to know the rules.
The Allowed Donors
So who is among the elite list of people that can help you with your dream of owning a home?
For starters, they should be related to you. This could mean by blood, such as your parents, grandparents, or siblings. It could also be a relative related to you by marriage, such as an aunt or an in-law. Finally, you may be able to receive gift funds from a close friend that isn’t related to you, but only if you can document your relationship. In other words, you must prove that you have a longstanding (at least five years) relationship with this person.
In some cases, you may be able to receive gift funds from your employer or a charitable organization as well. The one thing you need no matter where the funds originate, though, is the gift letter. Keep reading to see what this is all about.
Documenting the Gift
It’s awfully nice for anyone to give you money to put down on a home, but you have to make it official. You can do this with the gift letter. This letter shows the lender that the money is a gift and not a loan. while there isn’t a formal template for a gift letter, all gift letters should have the following information:
- Name of the donor
- Reason for the gift (down payment on a home with the home’s address)
- A statement that says it is not a loan
- The date
- The amount of the gift
- The donor’s signature
This letter must go to the lender who will make sure it’s legitimate. The lender will then also ask for proof of the donor’s funds. In essence, what they want is proof that the donor has had possession of the funds for at least 2 months. If the lender sees that the funds were recently deposited in the donor’s account, it throws up a red flag. The lender may wonder if the funds are a loan that the donor took out for you. It’s very important that there is a paper trail for the funds so that the lender knows beyond a reasonable doubt that the gift is not a loan.
Using Your Own Money
Luckily, you aren’t required to use your own money for many home purchase transactions if you have gift money. This applies only if it’s a primary residence, though. It must also be a single-family unit. If there are multiple units, the lender may require you to contribute at least 5% of the down payment if you put less than 20% down on the home.
Of course, each lender has their own requirements on top of the mortgage program requirements. Some lenders may require that you have your own money invested in the home in an effort to keep you motivated to continue to make your payments. When you don’t have your own money invested, it is a little easier to walk away from the home when you have financial troubles.
The bottom line is that the lender has the final say in who can give you money for a down payment. In general, any family member and even close friends can contribute to your cause. Before you accept any payments, though, it’s a good idea to review the topic with your lender to make sure you follow their requirements in order to get the loan.