Strings attached: What you need to know before counting on gift money for a down payment
When you’re saving to buy a home, help is always welcome. But if you’re counting on gift money to use as a down payment, make sure you’re allowed to accept the good fortune. Lenders restrict down payment donations. You’ll need to abide by the guidelines and keep the paper trail that shows how you did. Here are three important aspects of accepting gift money for a down payment:
Gift money doesn’t work for all loans
Donations that go toward a down payment can only be applied to mortgages on your primary and second homes. They’re not allowed on investment property.
A few of the types of loans that allow gift down payments include FHA or 203K home loans or what’s called a Conventional 97 Percent LTV Loan. As an aside, you may be able to obtain an FHA loan without any down payment at all, depending on your circumstances.
This gift can only come from certain people
Any relative, even one pretty far removed like a great-uncle, can provide a gift payment. Lenders tend to frown at gifts from friends though, unless they’re poised to become family, like a fiance.
Also, the giver cannot be someone who has a financial interest in the house or the sale. And the gift has to be just that: a gift, not a loan and not something you will ever have to pay back.
Gift payment portions may be limited
For conventional Freddie Mac or Fannie Mae mortgages, you may use 100 percent gift money as long as your down payment is at least 20 percent but you’ll have to fund part yourself if your down payment is lower than that. If you qualify for FHA or VA home loans, you can use gifts to make the entire down payment, though strictly for a primary residence.
Any time you plan to use gift money, be prepared to prove how you got it. You may need to solicit a “gift letter” from each giver, but templates are readily available online.