Down payments are one of the most daunting parts of the homebuying process. We all know, it’s a lot of money! Thankfully, you don’t necessarily have to drain your savings to come up with the sum. There are a few other ways to secure a down payment, including gift funds, grants and down payment assistance.
We’ve laid out all three so you can determine if any of these options are right for your financial situation. As always, the rules governing these forms of down payment assistance can vary by state and are subject to change 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 buying a home and a loved one wants to help us out.
Either way, gift funds are a wonderful way to take some of the pressure off the homebuying process. 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 of money that equates to more than half of your total monthly qualifying income. For example, if you make $3,800 a month, a significant monetary gift would consist of any single deposit equal to or larger than $1,900. For FHA or USDA loans, the gift standard is anything larger than 1 percent of the home’s purchase price or appraisal value, whichever is lower.
The loan application process typically includes 60 days’ worth of bank statements, which means an 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 lets the underwriter know 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 gift.
Speaking of the gifter, there are some parameters on just who can gift 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, grandfather-in-laws and domestic partners.
In addition to gifts from family members, FHA loans also allow you to receive gift funds from 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 your 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 fund, the person giving you the gift just might, so it’s always wise to talk to a tax professional prior to initiating this process.
Down payment grants can help fill the void between the money you’re 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 non-profits like National Homebuyers Fund.
Though these programs can vary by state, amount and requirements, they will typically take into account the price of the home 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, county, city and relevant professional associations to see if they offer any grant programs that may apply to you.
Grants typically offer this down payment assistance free and clear, meaning you don’t have to pay the money back, though you want to read the fine print. Some programs may include stipulations such as a recapture period, which means the money is only free and clear if you stay in the home for an established number of years.
Down Payment Assistance
Like grants, down payment assistance is a broad category for many different programs. This can range from interest-free, forgivable loans to interest-free deferred-payment loans and even low-interest loans. Down payment assistance programs also have a range of requirements, which may include 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 whether you enroll in a homebuyer education course.
Down payment assistance programs typically come from federal, state, city, county and charitable funds, so they’re your best starting point. Some down payment assistance programs will even let you use these funds for closing costs.
Though not every homebuyer will qualify for grants or down payment assistance – or be lucky enough to have a generous relative – these programs can ease the down payment burden. So 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 the dreaded subject of down payments. Do yourself a favor and see what you may qualify for!