Member FDIC NMLS #772685
Vice President - Mortgage Division
Using Gifted Funds for Your Down Payment
Many people who want to purchase a home often cannot do so because they cannot afford the down payment. It can take buyers years and years to save up for a down payment, but there is another option: gifted down payments. This means that part or all of the down payment is made as a gift on behalf of the borrowers to the lender. There are some specific rules that this gifted down payment must abide by, however
In order to be considered a gift, the funds must be given by a third party who doesn’t benefit from the sale and who isn’t involved in the transition. Additionally, the funds must be given by a relative or have some sort of familial relationship with the borrower. The lender must verify the source of the gift and ensure that the gift really is a gift. Personal loans that are subject to repayment are not considered a bona fide gift. Government agencies, charitable organizations, and non-profits can all provide gifts if it is verified that the gift is from a third party without a vested interest.
Funds that are gifted for a down payment must be documented with the date, name of the donor, and amount of the donation. This letter also must specify that the funds don’t require repayment. The lender will then use this letter to trace the gift to make sure it didn’t come from an inappropriate source. The lender will also typically require a withdrawal slip, bank statement, and deposit slip for the borrower’s account.
Many lenders will require the borrower to make a contribution to the down payment. However, Fannie Mae loans with more than twenty percent don’t have a minimum borrower contribution. If the down payment is less than twenty percent and involves a 2-4 unit home, the borrower must contribute. This contribution could be anywhere from 3% to 5%. Freddie Mac requires a 5% minimum borrower contribution for those who have a down payment less than 20%.