One of the toughest parts of the home buying process is coming up with a down payment for your new mortgage loan. One way of doing this if you don’t have the cash on hand is by using gift funds.
However, if you aren’t careful, using gift funds for your home purchase can lead to complications.
Here is some information that gives you an insight into the rules and limitations that apply for gift funds used to make down payments on a home purchase.
Who Can Gift Funds for Mortgage Down Payments?
Loans insured by the Federal Housing Administration allow for family, friends, your employer or others to give you money as a gift for the down payment.
Lenders generally won’t allow you to use a cash gift from just anyone to buy a home.
In order to ensure that a gift is not in fact a disguised loan, lenders put multiple restrictions on the field of eligible donors.
You won’t be able to use gift funds for your down payment from just anyone. Lenders have to protect themselves, so to ensure the gift funds are not actually an outside loan, there are multiple restrictions set into place.
The first consists of parties that are personally connected to the borrower, like relatives or friends who can materially prove their relationship.
The second includes non-profits or government organizations whose mission is to provide financial support to homeowners.
Eligible Gift Sources for a Mortgage Down Payment:
- Employer or labor union
- Close friend with clearly defined and documented interest in borrower
- Charitable organization
- Government agency
- Public entity that assists low-income/first-time home buyers
How Much Can Be Used From Gift Funds as Down Payment?
With FHA loans, the entire down payment can come from a gift.
There are no limits to the amount you can receive as a gift, according to Fannie Mae. If you’re putting down 20% or more on a loan that’s backed by Fannie Mae or Freddie Mac, it can all come from a gift.
For down payments that are under 20%, your lender may have different requirements when it comes to using your gift funds. You may have to contribute some of your own personal savings to get the loan in this case.
Additionally, if you have a low credit score, your lender may also require you pay a portion of the down payment.
Documenting the Gift
Lenders require you to provide some detailed documentation any time a down payment gift is changing hands.
Your donor must provide a gift letter that includes the following information:
- Borrower’s name
- Donor’s name, address and phone number
- Donor’s relationship to the borrower
- Gift amount
- A statement that the borrower isn’t expected to pay back the gift
- A statement that the donor has no interest in the sale of the property
- Property address
- Borrower’s and donor’s signature