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Down Payment Assistance: The Difference Between Gift Funds, Grants, and Loans

Down payments can be 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 programs.

We’ve laid out all three so you can determine if any of these options are right for your financial situation. 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 any time.

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Gift Funds

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 the 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, grandfathers-in-law, 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 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 just might, so it’s always wise to talk to a tax professional prior to initiating this process.

Grants

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 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. Your loan advisor will also know about many of the programs available, so be sure to ask them if you’re interested in more information.

Grants typically 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 may include stipulations such as a recapture period, which means the money is only free and clear if you stay in the home for a specific number of years.

Loans

Down payment assistance loans are a broad category that can mean a lot of different things. This can range from interest-free, forgivable loans to interest-free deferred-payment loans and even low-interest loans. These loan 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 more.

Down payment assistance loan programs can come from federal, state, city, county, and charitable funds and often have multiple options available. Some down payment assistance programs will even let you use these funds for closing costs.

Though not every 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 the dreaded subject of down payments. Do yourself a favor and see what you may qualify for! Our loan advisors are here and ready to help find solutions for getting you into that dream home. Click here to find an APM Loan Advisor near you.

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