Home purchases involve two key components: 1) Qualifying for the monthly housing payment based on your income and credit, and 2) The Down Payment which can run from 0% to 20-30% depending on the loan program.
Borrowers often think to themselves, “I can afford the monthly payment, but I don’t have the down payment.” If you think about it, this is fairly par for the course… because on some level – a person could theoretically be a month into his or her first job, and have the income that would qualify them to make the monthly housing payment on a loan (instead of paying rent). But, they wouldn’t yet have a down payment saved up; down payments usually take time, and they are saved diligently, over time, maybe requiring many years on the job. Alas, most of us are resigned to “grind it out for a while”, pay rent, and save, save, save to eventually buy a house. Alternatively, gift funds can be the solution.
Down Payment Gift Funds:
If you have family members that are willing and able to help you with your down payment, you might be able to get into your home sooner, and start building equity earlier. Many loan programs allow you to receive gifts that you can use for a down payment. There are rules to follow, and different programs will have different guidelines, so you may need help navigating the lenders to find the right loan for your needs. Constructively, the rules exist to make sure that a “gift” a borrower is receiving is in fact – a gift – that will not need to be repaid. The lender doesn’t want any strings attached to the gift, that might hinder repayment of the mortgage loan.
Most commonly gifts will come from blood relatives, such as parents, grandparents, or siblings. Family by adoption and marriage are OK as well. (Aunts and cousins may be OK, but that is where you need to know the guideline nuances of different lenders.)
On a conventional loan up to $417,000 loan amount, all of your down payment (100%) may come from a gift. So suppose you are buying a property for $438,947, with a 5% ($21,947) down payment and a $417,000 loan amount, the entire $21,947 down payment and the funds to cover closing costs, could come in the form of a gift from family. Of course if the gift provides for 10% or 20% down payment or more – that is fine too.
Conventional High Balance Loans: If you are many higher cost counties, such as here in California, then conventional loan limits may be as high as $625,500. For those loans from $417,000 up to the higher county limit, gift funds are fine, but at least least 5% of purchase price must come from the borrower’s own funds. (The 5% rule also applies to purchase of 2-4 unit building and second homes). After the minimum borrower contribution has been met, gifts can be used to supplement the down payment, closing costs, and reserves.
Jumbo Loans: There are some jumbo lenders that will allow you to use 100% gift funds for your down payment, but it is not the norm.
This is definitely an area to consult your loan officer. And, of course if you are in California, we can guide you.
Why can’t a gift come from a friend?
The lending institutions figure that friends – don’t give large financial gifts – to friends; and so the lenders, and the guidelines they follow, typically won’t allow a down payment gift from a friend, even it is a unique situation and the borrower were to document the gift with a “gift letter”. The lenders are forced to err on the pragmatic side and won’t allow it. The concern is that a gift from a friend or colleague will likely need to be paid back at some point, and so it will become an additional obligation of the borrower.