You might have heard that you can use a gift as down payment on your house. Is this true? Let’s find out! Consulting with a mortgage expert like First Coast Mortgage can help clear up any other questions you may have after reading this article.
Getting a Mortgage Approved
A mortgage is a loan acquired to purchase real estate. Lenders require mortgage applicants to show proof of employment, income, and credit history before approval for a mortgage. Many mortgage types allow the lender or buyer to use funds from an outside source for the down payment and closing costs on the house sale. A gift can be viewed as one such source.
Getting a mortgage can be difficult. The credit requirements are much higher now than they have been, credit scores are extremely important, and the down payment required by most lenders can be quite substantial. Because of all these factors, many people appeal to their parents or other family members for help with getting a down payment in the form of a gift.
Cash Down vs a Gift of Equity
There are two types of gifts that mortgage lenders will allow, cash down gifts and gifts of equity. A gift of equity describes a scenario where someone sells you property below the sale price of the property so you can utilize the difference. Jumbo loans and VA loans do not qualify for a gift of equity.
A cash down gift is more common and is as it describes–you get money from family or a friend to use for your down payment.
Gift funds from the borrower’s family or friends must be verified as available and may be counted toward down payment and/or closing costs up to the loan-to-value ratio without borrower contribution, if the gift is verified as a true gift and not a loan.
Can You Use a Gift as Down Payment for a Mortgage?
Typically, you can use gift money toward your down payment and mortgage closing costs. However, mortgage lenders will require documentation of the gift funds’ source to ensure that no mortgage fraud is taking place.
Documentation needed will be in two forms. First, a gift letter must be provided to document where the gift money came from and who is providing it. This ensures mortgage fraud is not occurring with false claims of gift income on mortgage loan forms. During underwriting, when your lender reviews your credit score, they will require confirmation that the money given to you by friends or family is indeed a gift and not a loan.
Second, evidence of the transfer of funds must be shown. What will suffice as evidence? You can use a withdrawal/deposit slip, or a check copy. The gift cannot be in the form of cash.
If you intend to apply a gift at closing, be prepared to bring a copy of the donor’s certified check and a settlement statement with the exact amount indicated.
Who Can Give You Money for Your Down Payment?
Lenders allow borrowers to use certain sources of funds toward their down payments, including gifts from family members or outside organizations (such as charitable organizations). The main restriction mortgage lenders impose on using gifted funds comes in the form of documentation requirements for how the gifted funds were obtained. This reduces the lender’s risk.
Where Can You Use a Gift as Down Payment?
In most cases, you can use a gift for a down payment on a mortgage only if the mortgage will be used to purchase property you intend to own, not rent out. While some mortgage programs allow for borrowers to purchase investment properties using a mortgage loan, they frequently require higher down payment amounts, or restrict other types of financial assistance, during mortgage qualification. In any case, borrowers should speak with their mortgage lenders about what sources of funds are allowed to ensure they are able to use gifted money for down payment on a mortgage.
If you’re looking for a mortgage in Florida or Tennessee then First Coast Mortgage Funding is here to help. We specialize in helping people purchase or refinance residential properties of all shapes and sizes–from single-family homes, multi units (such as an apartment complex), condos and townhouses. Make your dream come true by contacting us today so that one of our team members can get started working on finding options customized just for YOU.