Using Downpayment Gifts to Buy a Home

Cassandra Cumberlander, Remax Boston 781-269-9836

This is a great post written by my friend Ian that explains the right way to use downpayment gifts to buy a home. 

by Ian Kahanowitz, Seacoast Mortgage

Visit Ian Kahanowitz’s web page

Saving a down payment is one of the hardest parts of buying your first home.  About 25% of first-time homebuyers get help with a gift from a relative as part of their down payment.  There’s nothing wrong with this, but there are some regulations you need to consider as you plan for the big purchase.

Can you use a gift as part of your down payment? Limits on down payment gifts vary from one lender to the next.  If you’re planning to use a gift for some of your down payment, you should talk to your lender about its rules before you proceed.

With many loan programs, a down payment gift isn’t an issue, but with some mortgages, you may need to prove that you’ve provided most or all of the down payment yourself. Mortgage programs created with first-time homebuyers in mind, like the FHA loan and VA loan, as well as many state and local programs, allow a significant portion of the down payment to come from a gift. For an FHA loan, for instance, all of your down payment can be a gift from a relative.

With a conventional loan, things get trickier. Most conventional loans, depending on the lender, require a 10%-20% down payment. Of that down payment, a lender may require that some portion, often around 5% of the home purchase price, is provided by you and isn’t a gift.

Lenders will require clear documentation of a down payment gift to make sure the gift isn’t actually a loan. This documentation may include a letter and possibly even bank records from the giver.

How to Use a Downpayment Gift 

With all that said, using a down payment gift isn’t impossible and is, in fact, a common enough practice. Here are the steps you’ll need to take to make it happen:

1. Ask only family members. Gifts from friends, neighbors and co-workers won’t be accepted.

2. Get a letter. The giver will need to write you a letter with the details of the donation, including the exact amount, the property the gift is for, and your relationship with the giver. The giver will also need to explicitly state that the money is a gift and doesn’t need to be repaid.

3. Gather documentation. You may also want to have the giver gather documentation showing their ability to give the gift. Records will help ensure the down payment gift is accepted.

4. Record the transaction. There are a couple of acceptable ways to record the transfer of money between the giver and yourself. One is to have the giver transfer the exact amount in a wire transfer, keeping all documentation. The other is to ask for a check and to put the entire check in your home savings account at one time, getting documentation from the bank teller.

5. Keep all money together. One important key to successfully using a down payment gift is to keep the money together until you write your check to the lender. Have a separate account for your down payment savings and only deposit the exact gift amount in one transaction so that you can save the records. (In other words, don’t put a check from your grandma and a check from a freelance client into your savings account at the same time. Run these as separate transactions so there aren’t any questions about which money was grandma’s.)

6. Deposit the money a few months in advance. One way to avoid some of the more intrusive scrutiny from lenders is to season the down payment money by depositing it into your account a few months before you go home shopping. You’ll still want to keep documentation, just in case. But most lenders will assume money that’s been in an account for two or three months to be yours and may ask no questions.

Need help with mortgages in Massachusetts or Rhode Island? Contact Ian.

Ian S. Kahanowitz, Mortgage Loan Originator

Seacoast Mortgage

508-369-4996

NMLS 996431