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Understanding Down Payment Gifts for Your Mortgage

When applying for a mortgage, lenders need to know the source of your down payment, including any gifted funds. This is because gifted money can artificially inflate your bank account, and lenders need a realistic sense of your financial situation. They also want to ensure that gifted money isn’t a disguised loan that would add to your debt load.

What Is a Down Payment Gift?

A down payment gift is money given by someone, usually a family member, to help a homebuyer afford a mortgage down payment or related expenses like closing costs. To use gift money, you must follow the rules set by the lender and/or government agency insuring the loan. Small amounts, like a $100 birthday check, likely don’t need to be documented. However, lenders typically want to know about gift money that exceeds half of a household’s total monthly income.

Down Payment Rules by Loan Type

Here are the restrictions you’ll encounter for each of the most common home loan types. Generally, the rules focus on who can give money and what it can be used for.

Conventional Loan Down Payment Gift Rules

With conventional loans, lenders usually allow gift money for some or all of your down payment, closing costs, and financial reserves. Acceptable sources are limited to family members and romantic partners, and gift funds can’t be used on investment properties. You’ll need to provide a gift letter with details including the gift amount, the donor’s contact information, and a statement that repayment isn’t expected. Borrowers must also provide evidence of the donor’s sufficient funds or proof of transferred gift funds.

FHA Loan Down Payment Gift Rules

FHA loans are government-backed loans intended to help first-time or low-to-moderate-income families purchase a primary residence, with down payment requirements as low as 3.5%. FHA loans accept gift money for down payments, closing costs, or reserves. The sources can include family members, close friends, employers, labor unions, charitable organizations, and government agencies. A gift letter and documentation of the transfer of funds are required.

VA Loan Down Payment Gift Rules

VA loans help eligible military-connected home buyers purchase a primary residence. While VA loans don’t require down payments, you can put money down if you want to start with equity. Gift money can come from any donor not involved in the transaction. Gift funds can be used for an optional down payment, closing costs, or to cover the funding fee. A gift letter and documentation of the transfer of money are required.

USDA Loan Down Payment Gift Rules

USDA loans are intended for low-income individuals in suburban or rural areas and have no down payment requirement. Gift funds can cover closing costs but not financial reserves. A gift letter and evidence of funds are required.

How to Document a Down Payment Gift

Lenders require an accurate picture of your financial situation, including assets and debts. You must disclose if you’re using gift money for any part of the loan. A gift letter and documentation of the transfer of funds are required. Ask your lender for a template or specific requirements.

Alternatives to Down Payment Gifts

If down payment gifting rules seem too complex, consider these alternatives:

• Government-backed mortgages: VA and USDA loans require no down payment, and FHA loans require as little as 3.5% down.
• Zero down payment loans: Check eligibility for local and national down payment assistance programs.
• Low down payment options: Some conventional loans offer very low down payments, such as Wells Fargo’s program for first-time homebuyers with as low as 3% down.
• Save more: Consider delaying homebuying until you’ve saved more for a down payment.

FAQs

• Can You Pay Back a Mortgage Gift?
• What Is a Gift Letter?
• Who Can Gift Money for a Down Payment?
• Is Down Payment Gift Money Taxed?
• Is Your Credit Mortgage-Ready?

Remember, your down payment and bank balance are only part of the mortgage approval process. Lenders also scrutinize your credit report for payment history, debt load, and loan experience. A better credit score increases your chances of approval and securing lower interest rates and fees. Check your credit score before applying for a mortgage to see if you need to improve it.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate the mortgage process with confidence.

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