You’re buying a house, and it’s such an exciting time in your life. Maybe it’s your first house and you’re just starting out. You’ve found the one – your dream home – and it’s got everything on your wishlist. Maybe it’s slightly out of your price range, though. Before you give up and continue your search, a family member steps in and wants to help. “Just think of it as a gift,” they say and offer you a sizable amount of money. “Your Christmas for the next ten years.” Let’s face it – the standard 20 percent down payment expected can sometimes be a little hard to come up with on your own.
So, should you accept it? Is there anything wrong with accepting help from a loving family member, and putting that money toward your down payment on a home? Gift money has its own set of rules, especially when it comes to applying it toward real estate. Before you accept Aunt Jan, Uncle Bob or your mom or dad’s very generous help, you must first understand those rules. If you don’t follow them to a tee, then your mortgage lender may reject your loan application.
Firstly, the down payment gift is technically allowed. For an FHA loan, it doesn’t have to be money from a family member. It could be a friend or a boss, for example. However, with a Fannie Mae, Freddie Mac, VA loan or a jumbo loan, the gift must be from an immediate family member.
The requirements of using gift money toward the purchase of your home are as follows:
- You must receive a formal “gift letter” with the gift money. The giver or you must draft up a letter including only the amount of the gift, the relationship that the giver has to you, your address and a stipulation that the gift is in fact not a loan – it won’t be repaid. All parties must sign the letter.
- Keep a solid paper trail. If you’re putting a gift of money towards buying a home, you must have evidence of the paper trail ready. It must be a transfer of funds rather than a gift of cash given to you. You must have copies of your deposit slip, the donor’s withdrawal slip and proof that the money has been in the donor’s account for more than thirty days.
- If you’re taking out a conventional loan and putting down at least 20 percent, then all of your down payment may come from gifted money. If you are putting down less than the suggested 20 percent, then some of that can be gifted, but you’re expected to handle the rest. The exact percentage division depends on what type of loan for which you’re applying.
- If you’re taking out an FHA or VA loan, then the entire down payment may be gifted only if your credit score is above 620.
To conclude, if you’ve found your dream home and have a generous friend or family member willing to help you out, it’s totally legal to accept that help. All you have to do is be 100 percent sure that you’re doing the process the correct way, so that no red flags pop up for your lender. If you have any questions, our staff at First Lenders is fully qualified to answer them for you. We are excited to help! Click here to contact us.