You make enough money each month to afford a mortgage loan payment. You have little credit-card debt. And your credit score is solid. There’s just one hurdle keeping you from buying a home: the down payment.
Here’s the good news: If someone is willing to provide you with financial help, you can use gifted funds to pay all or part of your required down payment. Be warned, though, that both you and your donor will have to follow certain rules.
Down payments are a challenge for many home buyers. This isn’t surprising. Most mortgage lenders require down payments of at least 5 percent of a home’s purchase price when originating conventional mortgage loans. For a home with a purchase price of $200,000, this comes out to a down payment of at least $10,000. That’s a lot of money to scrape together.
But lenders do allow you to use gifted dollars to pay your down payment, something that can greatly reduce the financial burden associated with them. A family member, for instance, can provide you with that $10,000 that you’ll need to cover your down payment. When this happens, your name still goes on the mortgage loan. And you are still listed as the official owner of your home.
You will have to follow certain rules, though, before a mortgage lender will approve your down payment gift. First, and most important, the money you receive to pay your down payment must truly be a gift. It can’t be a loan that you have to later repay. The person giving you the gift must sign his or her name on a letter stating this, a letter that you must provide to your mortgage lender.
The letter should state the address of the home you are buying, the amount of the gift, the relationship between you and the person giving you the monetary gift and a statement saying that you will not have to repay the funds. Both you and the person giving you the gift must sign the letter.
It’s important to then deposit all of the money into a single bank account. And don’t spend any of it before it’s time to provide your down payment.