Down payments can be one of the most daunting parts of the home buying process. We all know: It costs a lot to buy a home! Thankfully, you don’t necessarily have to drain your savings to come up with the sum. There are other ways to secure a down payment, including gift funds, grants, and down payment assistance programs.
We’ve laid out all three so you can determine if any of these options are right for your financial situation as you navigate the home buying process. It’s important to understand that the rules for these forms of down payment assistance vary by state, region, and even city and are subject to change at any time.
“Gift” is one of the best four-letter words out there—and for good reason! We all love receiving money for special occasions like weddings, graduations, birthdays…or maybe simply because we’re a first-time home buyer and a loved one wants to help us out.
Either way, gift funds are a wonderful way to take some of the pressure off first-time home buyers. There are, however, a few steps you need to follow if you plan to use a significant monetary gift for your down payment.
Let’s start with what “significant monetary gift” really means. For conventional loans, it’s typically defined as any amount that equates to more than half your total monthly qualifying income. For example, if you make $3,800 a month, a significant monetary gift would be any single deposit equal to or larger than $1,900. For FHA or USDA loans, the gift standard is anything over 1% of the home’s purchase price or appraisal value, whichever is lower.
The mortgage loan application process typically includes 60 days’ worth of bank statements, which means a mortgage lender or underwriter will want to understand the origin of any large sums that aren’t accounted for in your history of assets and income.
Not to worry—these gift funds can be easily acknowledged through a gift letter that indicates that this money is, in fact, a gift and not a loan. The letter should contain the gifter’s name, address, phone number, relation to you, dollar amount gifted, and date of the gift. You may be required to show a paper trail of this gift, so be sure to keep receipts and statements.
There are some parameters on who can give you money that will be used for a down payment. For conventional loans, this gift needs to come from a family member, which can include anyone from spouses to step-aunts, adopted cousins, grandfathers-in-law, and domestic partners.
In addition to gifts from family members, FHA loans also allow you to receive gift funds from a close friend, your employer, labor union, or a charitable organization. USDA and VA loans allow you to receive gift funds from just about anyone—as long as that person isn’t involved in the home transaction. This disqualifies the home’s seller, builder, developer, or either party’s real estate agent.
Keep in mind that although you don’t have to pay taxes on the gift funds, the person giving you the gift might, so it’s always wise to talk to a tax professional. Your loan officer will be happy to explain more about gift fund requirements anytime.
Down payment grants can help fill the void between the money first-time homebuyers are able to put up for a down payment and the remaining down payment balance. Down payment assistance grants are offered through government agencies like the Department of Housing and Urban Development (HUD) and through nonprofits like the National Homebuyers Fund.
Though these mortgage programs can vary by state, amount, and requirements, they typically take into account the home price and geographic area, as well as your income and credit score. Some grants are also offered for individuals in certain professions, such as law enforcement, firefighting, and EMT.
Check with your state and local agencies and relevant professional associations to see if they offer any grant programs that apply to you. Your loan officer will also know what these programs require, so be sure to ask them if you’re interested in more information.
Generally speaking, grant programs offer this down payment assistance free and clear, meaning you don’t have to pay the money back (though you’ll want to read the fine print). Some programs require stipulations like a recapture period, which means the money is free and clear only if you stay in the home for a specific number of years.
Down payment assistance loans are a broad category that can mean different things. This can range from interest-free, forgivable loans to interest-free deferred-payment loans and even low interest rate loans. Some of these programs require income limits, approved geographic locations, purchasing a home below the given median home price for that area, how much money you’re able to put toward your down payment, and more.
Down payment assistance homebuyer programs can come from:
- Federal agencies
- State agencies
- Regional organizations
- Community organizations
- Charitable funds
In addition, some programs offer multiple options, including using these funds for closing costs. For a breakdown of what these types of programs are and how to find them, visit our blog.
Though not every first-time homebuyer will qualify for down payment assistance—or be lucky enough to have a generous relative—they’re worth looking into. Examining all your options before plunking down your hard-earned cash is a great way to put your mind at ease when it comes to down payments.
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