It’s become more common in recent years for aspiring homebuyers to receive gift money to assist them with their down payment on a house. But, before you run to a lender with your gift money in hand, there are a few things you should know about down payment gift rules.
What is down payment gift money?
Down payment gift money is money someone, typically a relative or close friend, gives to a homebuyer to help them cover a portion of their down payment or to be used toward closing costs. By receiving gift money to help with the down payment, a homebuyer may be able to afford a higher down payment or borrow less money.
Gift Money for Down Payment Rules and Protocols
If you’re hoping to buy a home, you probably know that one of the biggest expenses is the down payment. The average down payment on a house was 8% in 2023, according to the National Association of Realtors®. What you might not know is that many first-time and even repeat homebuyers use financial gifts to help pay for a down payment on their new home.
But, to ensure the gift funds are acceptable to your lender, down payment gift money givers and receivers must follow the strict rules and protocols for giving, receiving and using gift money for a down payment.
Giving a Cash Gift for a Down Payment
Financial gifts for down payments are widely accepted when they come from family (parents, grandparents, siblings, spouses, children). Some mortgage programs, like FHA loans, do allow for individuals outside of the family to gift cash for a down payment, such as an employer, government agency or a close family friend. Gifts from non-family members will require proof of a long-standing relationship.
Giving the cash gifts must be done in a particular manner. If you’re gifting money for a down payment, you can’t just hand someone a box of cash or make a bank transfer without careful tracking and authorization.
First, you must provide a signed down payment gift letter, stating that the money is intended for the sole purpose of purchasing a home and is not a loan. PrimeLending recommends that the gift money giver and the homebuyer work directly with the lender to draft an appropriate letter that includes all the required information.
With the down payment gift letter finalized and signed, the person gifting the down payment money will write a check for the dollar amount stated in the gift letter. Writing checks may seem archaic, but it’s the preferred method for lenders, and it’s easier to track than a wire transfer.
Receiving a Cash Gift for a Down Payment
If you’re the lucky receiver of a financial gift for your down payment, you can’t just deposit your check using an ATM or the banking app on your phone. You must physically walk into your bank to deposit it in person. Make sure you’re using the same bank that you will use for withdrawing all your money required at closing.
Be mindful not to deposit your gift check along with other gift checks (using multiple cash gifts for a down payment is acceptable), miscellaneous checks or cash. You need to keep each deposit transaction separate and collect a receipt for each deposit.
With the gift secure in your bank account and with copies of all your required documentation, you will work directly with your lender to appropriately transfer the money to the escrow company handling your home-buying transaction.
Using a Cash Gift for a Down Payment
Cash gifts are acceptable for many loan programs, including conventional loans, jumbo loans, FHA loans, VA loans and USDA loans. How much money you’re eligible to receive and the requirements for using cash gifts for down payments vary with each type of loan.
For example, when using a conventional loan, you can use a cash gift for the entire down payment as long you’re putting down 20% or more. If you’re putting down less than 20% on a conventional loan, then you may use only some of the cash gift while paying part of it out of your own pocket. Try this mortgage calculator to get an idea of what your mortgage payment could look like.
For FHA or VA loans, you can use a cash gift for your entire down payment, unless your credit score is on the lower side. With a lower credit score, you may be responsible for paying at least 3.5% of the loan amount payment yourself. Reach out to a mortgage professional to discuss the details and determine which loan program best fits your home-buying circumstances.
We understand that buying a home does not come with a one-size-fits-all formula. That’s why we specialize in pairing homebuyers with a mortgage program that makes sense for them. If you’re ready to purchase a home using a financial gift as a down payment, contact a PrimeLending loan specialist to learn about your options and requirements. We’ll walk you through every step of the financial gift giving and receiving process!
Product info as of 9/30/24, subject to change.
*2024 NAR Home Buyers and Sellers Generational Trends Report
