Coming up with a down payment can be hard, especially as home prices rise. Fortunately, if you have a generous loved one, they may be able to help you out.
Many loan programs allow what is called “gift money” when it comes to your down payment. But in order to use that money, you have to follow certain rules.
Do you expect to have financial help with your home purchase? Here’s what you should know about using gift money.
- The exact rules vary by loan and property type. Gift money rules can be slightly different depending on the loan program you choose (or if you’re buying a second home). With conventional loans, for instance, the gifter must be a family member or domestic partner. Ask your loan officer about the rules for your exact situation.
- Have proof that the money is a gift. Lenders need to know that the money isn’t a loan, which could strain your finances even further. They typically require a gift letter — a signed document from the donor stating that you are not expected to repay the funds.
- Document the source of the funds. Your lender will want to see a copy of the bank statements documenting the transfer of the funds, including the date on which the transfer happened.
- The gift may not cover the entire down payment. Some loans require you to make a “minimum borrower contribution” to show you have the financial capabilities to buy the home. Make sure to discuss this with your loan officer so you can be financially prepared.
- The donor may owe taxes on the money. You and the gifter may want to talk to a tax professional for guidance on the financial implications of using gift funds toward your down payment.
Please reach out if you need more guidance around the homebuying process.
