The biggest challenge for most people when it comes to buying a home is saving for the down payment. And most of us know that the more you can pay down, the better off you’ll be – with lower interest rates and mortgage payments and no private mortgage insurance to pay for. But saving nearly 20% of the purchase price is next to impossible for most of us. There is, though, another option: having the down payment gifted to you by a family member. But there are a strict set of rules you have to follow in this case. Read on to find out what Santa Cruz homebuyers need to know about receiving a down payment as a gift.
Overview of Down Payment as a Gift
It’s not common, but homebuyers sometimes use the money they have received as a gift for the down payment when they can’t come up with it themselves. And what is even less well known is that you have to document this gift and disclose it to your lender.
It’s not enough, from your lender’s perspective, that you have the down payment ready at closing. When using a down payment as a gift, you have to let your lender know.
“Even though lenders do allow gift funds, they also require mortgage applicants to disclose the source of these funds. Remember, when applying for a mortgage loan, the lender needs a clear picture of your financial situation. This includes information about your employment, income, and assets. This is why a lender will ask for copies of your most recent bank statements. The purpose of reviewing your bank statements is to ensure you have enough in reserves for mortgage expenses.”
Who Can Gift a Down Payment?
There are also restrictions on who can give a down payment as a gift and from whom Santa Cruz homebuyers can receive one. These restrictions vary by lender and according to the loan/mortgage program.
Some programs allow down payment gifts only from a blood relative. Others permit such gifts from a godparent as well, and still others include charitable organizations or non-blood relatives.
When it comes to loan type, here’s what’s allowed concerning who can give a downpayment as a gift:
- Conventional Loan (Fannie Mae and Freddie Mac) – Family only, including “by blood, marriage, adoption, or legal guardianship,” as well as finances and domestic partners
- FHA Loan – Family (excepting cousins, nieces, and nephews), close friends (which can include cousins, nieces, and nephews), and “employers, labor unions, and charitable organizations
- USDA and VA Loan – From anyone you have a relationship with, but they can’t be an interested party (someone involved in “your home purchase transaction”)
You Must Document the Money and Have a Gift Letter
The main thing Santa Cruz homebuyers need to keep in mind about receiving a down payment as a gift is that they have to document that money and have a gift letter.
Lender requirements for documentation (unless it is “seasoned” money) typically include:
- Bank statements
- Copy of check and deposit slip
- Copy of the gift-givers check
- Proof of wire transfer
- Copy of settlement statement indicating that the gift has been deposited
Your lender will also require you to submit a gift letter before you can use the money for a down payment. The purpose of this letter “is to prove your relationship with the gift giver and that the funds are a gift and repayment isn’t required.”
These gift letters have standard elements, but be sure to check with your lender to be sure. Your lender may provide a template you can use to make sure you get it right. It’s also a good idea to consult your agent about this. (Call 831-588-2334 to find out more.)
Can a Down Payment Gift Be Repaid?
As a Santa Cruz homebuyer, another thing you need to know about a down payment as a gift is that it cannot be repaid. It must be strictly a gift. Here’s why . . .
“If the buyer is planning to pay back the funds, that money was loaned not gifted, and then the lender is required to factor that into the debt-to-income ratio. This is to ensure that you can actually afford your mortgage payment. Withholding information about your downpayment sources could put your loan qualification at risk, and even more importantly, it’s considered mortgage fraud, which is illegal.”
Honesty about the gifted down payment is paramount.
Use Your Agent
As you can see, then, when it comes to a gifted down payment, there are some pretty strict requirements. It’s easy just by inadvertence to muck things up and possibly run afoul of the law. The best course here for Santa Cruz homebuyers is to let their local real estate agent guide them safely through the process. If you plan to use a down payment as a gift, contact us today at 831-588-2334 to make sure you get it right.
