“How much of a down payment can be a gift?” This is a question people often ask me, especially first-time home buyers. The short answer is this: you can use gift money to pay for all or some of your down payment and closing costs. But there’s plenty more to consider when buying a home, and in this article, I’m going to clear up a few of the big concerns you might have surrounding down payments and gift funds.
Some of you are blessed to have wonderful parents, grandparents, or other relatives ready to help you buy your first home. And I don’t mean they’re just willing to spend their afternoons hunting for houses with you. More than that, they’ve promised to help fund your dream of homeownership with the gift of cold hard cash (in the form of a check, but more on that later).
Super nice of them, right? And then your lender tells you that there’s a little more to it than just dropping mom and dad’s check in the mail. Suddenly you find yourself feeling grateful…but stuck, too. Your head begins swirling with questions like:
- What is a down payment?
- Where can I get my down payment from?
- How do I use gift money for a down payment?
- I’m buying my relative’s house — what’s a gift of equity?
It’s a lot to think about. But don’t worry, because I’m here to answer all these questions and keep you on track for a smooth buying experience. Let’s go!
What is a down payment?
A down payment is a payment that you make upfront when purchasing a home. This is usually a lump sum of money that you’ve saved up over time and have been keeping safe in a savings account. The amount of your down payment typically adds up to be a percentage of your home’s total purchase price, which could be 5%, 10%, 20%, or more.
The point of a down payment is to show your lender that you’re invested in the home you’re buying and minimize the risk that they’re taking on giving you a loan. Keep in mind that it’s common for conventional loans to require a 20% down payment, but there are plenty of alternative down payment options I’ll discuss in a minute.
As an example, let’s say you’re looking to buy a home that costs $300,000. A conventional loan will require a down payment of at least 20% of the $300,000 price tag. In other words, you’ll need to pay $60,000 upfront. That means you’ll finance the remaining $240,000 and make monthly payments to pay down that balance as we advance gradually.
I know what some of you are thinking. 20% down is a lot, and you don’t have that much saved. What now?
There are still plenty of options that will get you into your first home. How do I know? Besides being a seasoned professional, I’ve got this 2020 survey from the National Association of Realtors showing that in 2019, first-time buyers made a median down payment of only 6%. I promise you’ll get there, and here’s how…
Where can I get my down payment from?
Your down payment will likely come from money you’ve been saving over time. But if you don’t have enough, you can make up the difference a few different ways:
- Ask the seller: Though it’s not super common, sometimes all you need to do is ask, and the seller will credit you the down payment, or pay your closing costs, or even do both. But there are some restrictions, so be sure to ask a mortgage pro first.
- Use retirement funds: If you have a 401(k), you’re usually allowed to borrow from it to help with your home purchase. Certain rules typically apply, though. Again, check with a mortgage pro if you’re considering this option.
- Apply for assistance: Look into local, state, and federal programs that offer assistance to first-time home buyers.
- Qualify for 100% financing: If you have really good credit, you may qualify for 100% financing through special programs or government loans such as a USDA loan.
Finally, gift funds are common and are what many people use to purchase their first home. If you’re receiving gift money, here’s what you need to know…
How do I use gift money for a down payment?
Gift money is money that someone gives you to help with your home purchase, and that doesn’t come with the expectation of repayment. When you’re using gift money, you need a letter signed by the donor stating that the funds are a gift and are not a loan that you have to repay. This letter will include things like:
- The donor’s name and contact info
- The donor’s relationship to you
- The address of the home you plan to buy
- The exact amount of gift money
- The donor’s bank account info
- Names and signatures of donor and recipient
Your lender will also likely ask for proof of the funds transfer from your donor’s account to your account, usually in the form of a bank statement. They essentially want a paper trail showing the donor’s intent and proof that you’re using the money for your down payment.
Gift money usually comes from family, but there are rules for this depending on who is servicing your mortgage:
- Primary residence and down payment/closing costs: Conventional loans and most government loans allow gift money to be used for your down payment and/or closing costs if you’re buying the home as your primary residence. If you’re buying a second home or investment property, there are additional restrictions. Talk to a mortgage pro like me for details.
- Family requirement: Fannie Mae, Freddie Mac, and FHA loans require gift money to come from a family member. However, VA and USDA loans don’t. There are some gray areas here, though, so contact me, and I’ll explain them.
- Minimum borrower contribution: Depending on your lender, your property type, and your down payment amount, you might be required to contribute some of your funds in addition to gift money toward your down payment. This can influence how much of a down payment can be a gift, so get in touch to clarify your specific situation.
What’s a gift of equity?
Besides how much of a down payment can be a gift, people also wonder about what’s called a gift of equity. This is basically when someone sells a property to a family member or friend, selling for a lower price than the current market value. Imagine your uncle Gordy sells his $300,000 house to you for only $240,000. The $60,000 difference is considered the gift of equity and can serve as your down payment.
Want to see how far your gift money will go? Get preapproved
You can use gift money for your down payment and closing costs. But the first step is knowing how much home you can afford. Start your preapproval online or call the Murphy Mortgage Team at 508-407-8300.
If you’re still thinking, get our Path to Homeownership Guide so you can understand just what to expect during your buying journey.