Many first-time home buyers are surprised to learn they can get down payment help from their parents or other family members. This kind of aid can help a buyer overcome the upfront hurdles on the path to homeownership.
Here are five things to know about it right from the start:
- Most mortgage programs allow borrowers to use gift money from an approved third-party donor.
- Gifting is when another person contributes money to the buyer’s closing costs or down payment.
- The list of approved donors can vary, but it usually includes parents and other family members.
- The person providing the funds must sign a letter stating that they do not expect repayment.
- There are other forms of down payment assistance as well, including grants and forgivable loans.
There are other important requirements as well, and we’ll cover those below!
Down Payment Gifts Explained
Most home buyers who use a mortgage loan to buy a house have to make a down payment of some kind. The minimum amount that’s required can vary depending on the type of loan, the amount being borrowed, and other factors.
For a conventional mortgage loan, the lowest down payment is usually 3% of the home’s value. On a median-priced home in the U.S., that would come out to more than $10,000. In a pricier market like California, a typical down payment could easily exceed $25,000.
But a lot of home buyers don’t have that kind of money in the bank. They find themselves in a situation where (A) they could easily afford the monthly payments for a mortgage loan but (B) can’t save enough for a hefty down payment.
This is the exact scenario where down payment gifts can be helpful.
Definition: A down payment gift is a monetary contribution from a family member, close friend, or other approved donor toward the purchase of a home. The money must truly be a gift, and not a short-term loan. It can be used to cover all or part of the buyer’s minimum required down payment.
Mortgage lenders often sell their loans to organizations like Freddie Mac or Fannie Mae. So they have to make sure they follow the loan guidelines established by those corporations.
Here’s how Freddie Mac defines “gift funds” in a down payment context:
“Gift funds or a gift of equity are an eligible source of funds for a Mortgage secured by a Primary Residence or second home provided that funds do not have to be repaid and the donor is: a Related Person, a trust established by a Related Person, or the estate of a Related Person.”
Similarly, here’s what the official handbook for FHA loans says about it:
“Gifts refer to the contributions of cash or equity with no expectation of
repayment. Gifts may be provided by: the Borrower’s Family Member, a close friend with a clearly defined and documented interest in the borrower…”
In both cases, the definition of a “family member” includes parents.
How to Get Help from Your Parents
Here are the general steps you would take when getting down payment help from parents or other members of the family. These guidelines apply to most mortgage programs.
Step 1: Speak to a mortgage lender about it.
Start by speaking to a mortgage loan officer or broker about the different programs that allow such contributions.
Both FHA and conventional loans allow for down payment gifts, and the rules are generally the same. But there are some differences when it comes to allowable sources of funds, how long the money needs to be in the bank, etc.
Step 2: The parent or family member provides gift money.
Once you’ve identified a mortgage program that allows for third-party assistance, or gifts, you could then have your parents provide you with the funds to put into your bank account.
It’s best to have the money deposited into your account sooner rather than later. Mortgage underwriters will want to see copies of your bank statements that show when the deposit was made. So the sooner you get it in there, the better.
The specific requirements for deposit verification can vary from one mortgage lender to the next, and also depending on the type of loan you’re using. That’s why we stress the importance of speaking to a mortgage company first, before you start making other arrangements.
Step 3: The parent or family member provides a gift letter.
The most important caveat here is that the money being donated by your parents or family member must truly be a gift. In other words, it cannot be a short-term loan provided from one family member to another.
If you receive monetary assistance from a parent, for example, they must write a letter that says they do not expect any form of repayment. Your mortgage lender will probably require this, and the underwriter will look for it as well.
This rule applies to FHA and conventional home loans alike. A gift letter is almost always required in these scenarios.
Step 4: The underwriter will verify the down payment funds.
It is the underwriter’s job to make sure that you, the borrower, meet all requirements for the type of loan you are using. They’re like paperwork detectives who work for the mortgage company.
Underwriting requirements vary depending on the type of mortgage loan being used and other factors. But you can be sure that the underwriter will look at bank statements to see how much money you have in the bank, and how long it has been there.
Some mortgage companies have specific requirements for “source and seasoned” funds. Generally speaking, if the down payment funds have been in your bank account for at least a month — and they can be easily traced back to the source — you should be okay.
But again, you will want to check on these requirements as early on as possible.
Step 5: Closing the deal.
The rest of the mortgage process continues just as it would with any other borrower, regardless of where the down payment money came from.
The home will be appraised. The underwriter will finish his review process. And you’ll eventually move on to the closing stage. This is where you sign all of the loan documents, tax documents, and other paperwork relating to the sale of the home.
The escrow company will ensure that everything is in order, and then send the signed and finalized documents back to the lender. Shortly thereafter, the mortgage lender will release the funds for the loan.
Disclaimer: The rules and procedures for getting down payment help from a relative can vary from one mortgage lender to the next. As a result, your situation may differ from the example walk-through provided above. If you plan to use down payment gift funds when buying a house, ask your lender about it up front.
Brandon Cornett
Brandon Cornett is a veteran real estate market analyst and reporter. He has been covering the U.S. real estate market for nearly 20 years. More about the author