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Mortgage Down Payment Gift Rules

Down payments are one of the biggest hurdles to purchasing a home. Fortunately, if you haven't saved enough of your own funds for a home purchase, many lenders allow borrowers to purchase a home with gift funds.

Do You Have to Disclose a Gift?

If a parent, sibling or grandparent offers to gift funds for your mortgage expenses, you may not disclose this information to your lender. From your perspective, as long as you arrive to closing with enough funds, you should be okay, right? Unfortunately, it's not that simple. 

Even though lenders do allow gift funds, they also require mortgage applicants to disclose the source of these funds. Remember, when applying for a mortgage loan, the lender needs a clear picture of your financial situation. This includes information about employment, income and your assets. This is why a lender will ask for copies of your most recent bank statements. The purpose of reviewing your bank statements is to ensure you have enough in reserves for mortgage expenses. But sometimes, a family member offers to pay these expenses as a gift to you.

Mortgage Down Payment Gift Rules

There are specific rules for using gift funds as a down payment. For starters, your lender will need information about the donor. Donor requirements vary by lender and mortgage program. Some programs only allow gifts from a blood relative, or in some cases, a godparent. Other programs, however, will also allow gifts from a charitable organization or a non-blood relative. Speak with your lender for information on acceptable donors.

Before you can use gift funds for your down payment and/or closing costs, you need to submit a gift letter to your lender. This letter is important because some lenders do not allow applicants to borrow funds for their down payment or closing costs. If you borrow funds, some lenders include this loan when calculating your debt-to-income ratio. 

The gift letter must include the name of the donor, their phone number, address and their relationship to you. The letter must also state whether funds are a gift or a loan. If funds are a gift, repayment isn’t expected.

Be aware that even when using gift funds, you may be required to contribute some of your own funds, depending on which mortgage you choose. For example, if you apply for a conventional loan and put down at least 20%, all of your down payment can come from a gift. If you put down less than 20%, you are required to contribute some of your own funds.

Bottom Line

Gift funds are a godsend if you are ready to purchase a home but don’t have sufficient cash. Of course, not everyone is fortunate to receive gift funds. The good news is that there are programs that offer down payment assistance and low-down payment options. Give us a call to see if you’re eligible for a low down payment loan.