That’s where a down payment gift comes in — if a close friend or family member wants to chip in and help the prospective homebuyer purchase a home, they can do so. However, there are strict rules and regulations for such a transfer of cash. Here’s what you need to know.

Check your eligibility to use gift money for a down payment. Start here (Sep 16th, 2024)

How does using gift money for a mortgage down payment work?

“I see gift money becoming more popular, especially among millennials,” says Joann Perito, broker and owner of Avenues Unlimited. “Even if they make good money, because of large student loan amounts, it can be difficult for them to save for a down payment.”

In 2020, 58% of home buyers came up with their down payment primarily from their own funds. But this cost is often prohibitive, especially for first-time homebuyers who don’t have the benefit of funds from the sale of their current residence. 

You can use gifted funds to make a down payment, but your mortgage lender will want to know some details before they allow you to use it. Only two specific groups can give a home buyer money to fund their down payment.

• Family members — as long as they can prove they have a standing relationship with the buyer. Sometimes the gift can come from a friend as well, but not all loan programs permit this.
• Government agency, non-profit, or other organization offering down payment assistance — as part of a program meant to get first-time buyers into the market.

Dos and don’ts of a down payment gift

Check your home buying eligibility. Start here (Sep 16th, 2024)

Can you pay back a mortgage gift?

The answer is no. This is considered mortgage or loan fraud, which is a crime. It can also put your loan qualification at risk as all loans need to be factored into your debt-to-income ratio.

Perito has seen borrowers tell the lender their parents are gifting the money, but it’s actually a loan. “They expect their kids to pay it back eventually,” she says. “That can cause a problem because the lender has to take that into consideration for the debt-to-income ratio.”

The moral of this story: Be honest with your lender about where you’re receiving all funds for your down payment — they’ll likely find out anyway.

What else should you know about down payment gifts?

As previously mentioned, there’s a difference between receiving a down payment gift and a down payment loan. Buyers need to be clear with their mortgage lenders and confirm that the money received was gifted. A sudden infusion of cash without a traceable source will leave lenders suspicious and, perhaps, wary of completing the loan deal on their end.

Plus, you should talk with your lender to make sure you are reporting the gift properly to the IRS. The responsibility for this is on the borrower and gifter, as lenders are not required to report it.

Check your home buying eligibility. Start here (Sep 16th, 2024)

Tax implications of a down payment gift

As previously mentioned, family members have to pay a gift tax for anything over their limit of $17,000, or a collective $34,000 from parents who file taxes jointly. The person receiving the money doesn’t have to pay taxes.

If the donor wants to give more than $17,000, they can either pay taxes or claim the money as part of their $12.06 million lifetime exemption for gift taxes. However, this decision shouldn’t be taken lightly, especially if the donor hopes to pass on a hefty estate to their heirs later on. The $12.06 million exemption applies to taxes on these funds, so using up the value now could force family members to pay tax on whatever they inherit.

For borrowers interested in borrowing more without tax implications, there may be options involving separate gifts. Speak with a CPA if this applies to you.

Buying a home is more than a down payment

Ultimately, the cost of the down payment is only one expense to consider in the home-buying process. Homebuyers need to pay for closing costs, which include expenses like an appraisal, credit report, and underwriting fees.

“Many people these days have a hard time coming up with $1,000 to become a homeowner,” Perito says. “I always ask them where they’ll be getting money for the inspection, moving costs, and other expenses. I suggest to all my buyers that they have at least $4,000 in the bank before they buy a house.”

Down payment gifts can make it easier for homebuyers to afford a home

If you’re in the market for a new home and want a little help, don’t hesitate — just make sure you follow the above steps to ensure you accept such a gift in the proper manner. A gift can put homeownership in reach for plenty of aspiring homeowners.

When you speak with your lender about which loan program is best for you, be sure to let them know up front that you plan on using gift funds for the down payment. Some loan programs have strict guidelines about how much gift money you can use for a down payment and who can gift you the money.

Check your eligibility to use gift money for a down payment. Start here (Sep 16th, 2024)

What is a gift letter?

A gift letter confirms the relationship between you and the gift giver

If you plan on getting gift funds from a friend or family member, you’ll need a gift letter confirming your relationship to the giver. The letter also must indicate that the money is a gift and that there is no expectation of repayment. Usually, the letter is signed by both interested parties.

Gift Letter Template

The lender may also require further evidence of the gift — for instance, they may ask to see the gift-giver’s bank statements to show there are sufficient funds in the donor’s account to make the gift. They may also ask for a deposit slip or balance statement from the buyer’s account to show the down payment funds have been transferred.

Often gifts change hands during the application process. This allows time for the money to show up on both the giver and the buyer’s bank statements and for the mortgage lender to verify that the cash is from a legitimate source and the pair has an appropriate relationship.

If the gift funds are added to the buyer’s bank account after settlement, then documentation will still be required before it can be applied to the purchase. Typically, this will require a receipt of the cashier’s check as given to the closing agent.

Why do I need a gift letter?

You’ll need to provide a gift letter to your lender for a few reasons. 

First, the lender wants to assess your debt-to-income ratio (DTI) accurately. With that, the lender wants to confirm with you that there is no expectation of repaying the gift money. If you were expected to repay the gift, that could significantly impact your DTI. 

Second, government agencies want to confirm that the funds are legitimate and conform with all gift tax laws. Basically, the government wants to ensure that this gift money is not a part of a money-laundering scheme.

Check your home buying eligibility. Start here (Sep 16th, 2024)

Gift letter rules by loan type

Depending on the type of loan you are pursuing, there are slightly different gift letter rules. You’ll need to outline exactly how you are related to the gift giver in your letter with each loan type. Your loan officer should be able to provide you with the correct gift letter rules and format for your loan.

Here’s what you need to know about each. 

VA loans

The VA loan allows eligible military service members and veterans to purchase a home with 0% down. If eligible, you can receive a gift for your home purchase from almost anyone. However, the gift cannot be from an interested party. 

Interested parties would include a builder, developer, real estate agent, or seller. Essentially, anyone involved in your home sale transaction is not allowed to provide gift funds.

Check your VA home loan eligibility. Start here (Sep 16th, 2024)

Conventional loans

Conventional loans allow homebuyers to use gift money to cover a down payment and closing costs. The only caveat is that the funds must be from an acceptable source. Acceptable sources of gift funds include most family members. 

Fannie Mae and Freddie Mac consider spouses, children, and dependents to be relatives. Essentially, anyone related to the borrower by blood, marriage, adoption, or legal guardianship can provide gift funds. Additionally, a fiance or domestic partner can provide gift funds. 

Importantly, you cannot receive gift funds from someone involved in the transaction. 

FHA loans

If buying a home with an FHA loan — a loan guaranteed by the Federal Housing Administration — then you can use gift funds from certain parties. As with a conventional loan, you can receive gift funds from a relative. Additionally, your employer, labor union, or close friend can offer gift funds. And of course, government agencies that provide homeownership assistance grants can provide gift funds.

Again, you won’t be able to accept gift funds from anyone involved in the real estate transaction.

Check your FHA eligibility. Start here (Sep 16th, 2024)

USDA loans

USDA loans help borrowers in rural areas achieve the goal of homeownership. As a borrower pursuing a USDA loan, you cannot receive gift funds from any interested parties. 

But you may receive gift funds from family members and others who want to help.

Check your FHA eligibility. Start here (Sep 16th, 2024)

Down payment gift rules by property type

The use you have planned for the property will impact how gift funds can be used. Here’s what you need to know. 

Primary residences

If purchasing a primary residence, the loan options above may all be on the table. Depending on the loan type, you can use gift funds to cover some or all of the down payment amount. Additionally, gift funds can be used to cover closing costs. 

Secondary residences

If you are purchasing a secondary residence, your loan options are more limited. In most cases, you’ll have to pursue a conventional loan. With that, you can still accept gift funds. However, a lender may require you to contribute some of your own funds to supplement the gift when closing on a secondary residence. 

Investment properties

In general, borrowers cannot use gift funds as a down payment on an investment property. Typically, investors will need to come up with at least 5% of the down payment out of their own pocket. But the rest can be a gift. 

However, if you are using gift funds to support the purchase of an investment property outright, there are no explicit rules against that. Of course, you’ll need to abide by the tax rules surrounding gift limits. But if the gift is under the $17,000 limit, you may be able to use gift funds to help purchase an investment property outright. 

How much money can I receive as a gift?

As of 2023, any one person can contribute $17,000 to any other one person without tax consequences, which could, for example, total as much as $34,000 to one child, if each parent contributes.

In many cases, there’s no limit on the dollar amount of gift money that can go into a down payment, as long as the buyer is purchasing a primary residence. However, if someone uses a down payment gift to buy a second home or investment property, they have to pay at least 5% of the down payment. The rest can be a gift.

What is seasoned money?

If possible, it’s a good idea to ensure gift money is seasoned when it comes time to funnel it into a down payment — this avoids the gift documentation needed, too. Lenders want proof that funds have been in the buyer’s account for a substantial amount of time to show that the buyer hasn’t just gathered a bunch of cash on a short-term basis.

Seasoned funds should sit in the buyer’s bank account for, ideally, two months before the buying process. So, if you received a $10,000 gift from your Aunt Mary three months ago to help you buy a house, then the bank probably won’t ask about it — this is seasoned money.

Check your eligibility to use gift money for a down payment. Start here (Sep 16th, 2024)

Down payment gifts FAQ

How do I write a gift letter for a down payment?

A gift letter will need to confirm the donor’s relationship to the buyer. Plus, it should verify that the donor does not expect any repayment of this gift. 

And it can go something like this:

I, the gift donor, intend to gift $X amount to the gift recipient. The gift recipient is my (list relationship, such as son or nephew), and will use the funds as a part of their purchase of X property. I expect no repayment of this gift. The source of the gift funds is X. 

The donor will need to sign off on the letter, which must be provided to your mortgage lender. Plus, the donor may want to include their phone number in case the loan officer has any questions.

How much can be gifted for a down payment?

Any amount can be gifted for a down payment. But as of 2023, parents can only contribute a combined $34,000 per child to help with a down payment, otherwise, the gift would be subject to a special tax. Other family members have a $17,000 lending limit before they also run into the gift tax. 

Do all lenders require a gift letter?

Yes, all lenders will require a gift letter. Although you may have the funds, the lender needs to confirm that you won’t have to repay the gift. Plus, the lender must ensure that the funds came from a legitimate source. 

What is a gift letter for a mortgage down payment?

A gift letter is a document that the borrower and donor will need to provide a mortgage lender in the application process if the applicant received gift funds to cover the down payment. The goal of a gift letter is to provide the lender with proof of where the funds came from. Plus, ensure that the funds do not have to be repaid. 

Who should write a letter of explanation for a gift down payment?

The donor should write the gift letter to the lender. However, the borrower can help the donor craft a letter as long as the donor signs the document. 

Can a mortgage gift be repaid?

The gift letter will have to explicitly state that the donor doesn’t expect repayment of the funds. With that, you cannot repay the donor. 

What happens if you pay back a gift down payment?

If you pay back a gift down payment, after a gift letter explicitly stated that you would not, that will constitute mortgage fraud. With that, your home loan may be at risk. 

Does a mortgage gift letter get reported to the IRS?

A mortgage gift letter that shows a gift of less than $17,000 might not be reported to the IRS. That’s because any gift below the $17,000 limit will not incur the gift tax. However, gift letters that involve a gift of more than $17,000 will likely be reported to the IRS. With that, the involved parties should be prepared to cover the gift tax. 

Keep in mind that the limit will change each year. 

Are there tax consequences for giving down payment gifts?

As of 2023, the gift tax will be levied on gifts of more than $17,000 per donor. With that, parents can gift an adult child $17,000 each in 2023 for a combined total of $34,000. After that threshold, the gift would be subject to a tax. 

If you give a gift of more than the current limit, you should expect to pay taxes on the amount of the gift. 

What is a gift of equity letter?

A gift of equity is when someone sells you a home for much less than it is actually worth. For example, a parent may sell a child a home worth $250,000 for $100,000. In this situation, the seller would have to provide the lender with a gift of equity letter. The letter would outline the exact amount of equity gifted. However, keep in mind that the gift tax still applies to the amount gifted through this option. 

Check your eligibility to use gift money for a down payment. Start here (Sep 16th, 2024)

The post The Do’s & Don’ts of Down Payment Gifts | Free Gift Letter Template first appeared on My Mortgage Insider.

Comparison shopping for a mortgage isn’t common. According to the Consumer Financial Protection Bureau, only 30% of American borrowers look at more than one lender for a home loan. In the next 10 years alone, it’s expected that Millennials are set to purchase 10 million new homes. This wave of first-time homebuyers means that many homebuyers will overpay for their mortgages.

As you shop around for a mortgage, below are the main points to keep in mind and the mistakes to avoid as you secure an affordable price and attractive terms.

Check your mortgage rates. Start here (Sep 16th, 2024)

Why is it important to shop around for a mortgage?

Before you begin the process of comparison shopping, a little context will help. There isn’t a standard set of rules or offers among all mortgage lenders. Each lender sets its own underwriting guidelines, fees, and interest rates. Bottom line: You may find a better deal with one lender than with another.

To start, you’ll want to find a mortgage lender that offers a good interest rate. Changing rates have a compounding impact over time and even a slight increase like 0.5 percent cost a considerable amount of money over the life of a loan. It’s also important to note that interest rate type matters too. An adjustable-rate mortgage may rise at some point in the loan term and increase your monthly payment. Fixed-rate loans by comparison won’t change.

There are also other factors that will influence your final decision beyond interest rates. Consider the following when comparison shopping lenders:

1. Points. Fees that have a link to your interest rate. Usually, the more points you pay, the lower the rate.
2. Fees. Assorted fees such as loan origination and underwriting fees, broker fees, etc. Many are negotiable.
3. Closing costs. The costs associated with closing your loan. The lender or broker should have an estimate if you ask them.
4. Down payment. Some lenders require 20%, though others may require as little as 5%. A lower down payment will likely require private mortgage insurance (PMI).
5. Private mortgage insurance. PMI is an additional cost added to your mortgage to protect the lender in case of borrower default when the loan down payment is low.

If you have questions about what you’d qualify for, you can consult a lender directly about the details of the mortgage.

Check your home buying eligibility. Start here (Sep 16th, 2024)

It’s more than just interest rates

Before you meet with lenders, it’s best to be prepared. Asking the right questions (hint: they should go beyond interest rates) allows you to learn the most about your options. The questions below are a good place to start.

1. Do you communicate with clients in person, or through text, emails, or phone calls? How quickly do you respond?
2. What lender fees am I responsible for at closing? Can any be waived or rolled into the mortgage?
3. How long is your average turnaround time for pre-approval, appraisal, and closing?
4. Does buying discount points to lower my rate make sense?
5. What are the down payment requirements?

When you have the relevant information, it’s easy to make an informed decision and choose the mortgage that’s right for you.

How do you find the best mortgage lender?

A simple search online is the easiest way to locate lenders. Though, don’t underestimate asking friends, family, or real estate agents for their recommendations. Similarly, look out for lenders with high ratings. If other homebuyers feel positively about their experience with the lender, they’re a far better candidate than another with poor reviews.

Keep in mind any rates you see online are just estimates — you may pay more depending on your situation. You can use your research as leverage when negotiating your mortgage rates and could improve your chances of finding the most affordable mortgage for you.

Also, ask each lender about the earnest money deposit. Most mortgage lenders require this to start the loan process, and under certain circumstances, they’ll return it. If they can’t specify those circumstances, you should look elsewhere.

Check your mortgage rates. Start here (Sep 16th, 2024)

Before you meet with lenders

First, review your credit report — Equifax, Experian, and TransUnion legally must provide a free copy of your report once every 12 months. If there are any issues on your report, it’s best to resolve those before reaching out to lenders.

Next, review the different types of mortgages to see which is ideal for your financial situation. From conventional loans to government-backed loans like FHA and VA to interest-only mortgages to other hybrid and specialty types, you’ll have no shortage of options when shopping around. Also, decide if you want an adjustable-rate mortgage or a fixed-rate mortgage.

As you evaluate the various loans, give thought to which will work best for you. An FHA loan may appeal to you with its minimal down payment and credit score requirements, or if you’re a veteran or active-duty servicemember, then a VA loan may interest you. There isn’t a one-size-fits-all solution.

Should you shop around for a mortgage?

Yes — comparison shopping for a mortgage can mean more money in your pocket. Start with some basic research and talk to lenders. Once you have a foundation of planning and preparation, you’ll feel confident in your choice and save you money in the process.

Check your mortgage rates. Start here (Sep 16th, 2024)

The post How To Compare Mortgage Lenders & Why It Matters first appeared on My Mortgage Insider.

According to a 2017 National Association of Realtors report, 76% of millennials feel they can’t save for a down payment due to student debt. Furthermore, 23% of respondents were denied a mortgage in the past. The constant pressure of debt — and the additional burden of living expenses — can place you in an undeniable disadvantage when trying to qualify for a mortgage.

See if you qualify for a home loan today.

Can you get a mortgage with student loan debt?

Despite the grim statistics, the easy answer is yes.

Of course, student loan debt can pose a problem if you intend to purchase a home in the near future, but it isn’t an insurmountable barrier to entry. Young people are still able to realize dreams of homeownership. In fact, in the next ten years, millennials are expected to purchase at least 10 million new homes.

Despite the obstacles, you still have options if you’re intent on homeownership. With hard work and patience, you can reach your goals and achieve your aspirations. We’ll walk you through everything you need to know and more, helping to ease your transition to your new role as a homeowner.

How to qualify for a mortgage with student loan debt

There are three things you should focus on when trying to qualify for a mortgage — your credit score, debt-to-income ratio, and down payment amount. While there are other qualifications that you’ll need to meet for a mortgage, these three are ones that you have direct control over.

Credit score

Your credit score is a simple number that represents the risk the lender takes in letting you borrow money. It shows lenders that you’re responsible with your money by making on-time payments on your loans, credit cards, and utilities. The higher your score, the less risk to the lender.

You should take steps to improve your credit score as a higher score will not only make it easier to qualify for a mortgage, but it’ll make you eligible for lower interest rates too. It’s best to avoid too much credit card debt — limit yourself to one or two major credit cards you make payments every month. The good news is that over time, your punctuality and smart financial choice will reflect in your credit history.

This scale illustrates the differences in credit scores and risk levels.

• Excellent: 800 to 850
• Very Good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: Below 580

Debt-to-income (DTI) ratio

You’ll also want to decrease your debt-to-income ratio. Your DTI ratio shows the portion of your monthly income that goes toward your debt payments like student loan payments and credit cards. It’s also one of the most critical factors in receiving approval for a loan — most lenders look for a DTI ratio of under 45%. If you want to get your DTI ratio acceptably below 45%, you have a few different options:

• Increase your income. Consider taking on a side gig or second job. Or, stretch your current income by cutting your entertainment expenses.
• Reduce your overall debt. Refinance your student loans into a lower interest and monthly payment, and transfer credit card balances to a card with a 0% interest introductory offer to pay off debt faster.
• Delay your loan application. You may decide to wait a few months before applying for a mortgage to pay down (or off) some debt or to increase your credit score.
• Provide a larger down payment. The higher your down payment, the less your total loan amount. And, the lower the amount you need to borrow, the lower your monthly payments and potentially your need for private mortgage insurance, which can stretch your income so to speak.

Down payment

If you’re busy paying off student loans, it may seem impossible to save up for a large down payment. But, there are options available to help.

• Gift funds. Many loan types allow gift funds from a family member to be used towards a down payment and/or closing costs.
• Down payment assistance programs. Check with your local municipality or state government to see what’s available in your area. You’ll have to meet the qualifications for your chosen program, but you may find these requirements easier to manage than saving up.
• Low down payment loan type. There are many loan types that require little to no down payment, including FHA, USDA, VA, and Conventional 97 loans.

Should you purchase a home with student loan debt?

If you’re among the 44 million Americans who collectively hold almost $1.5 trillion in student loan debt, the responsibility of a mortgage might prove too much to handle financially.

You need to feel completely secure in your ability to pay off your debt, your mortgage, and your general living expenses.

The burden of student loan debt isn’t the only reason you might hold back, though. If you live in a state where home prices are high, like California or Hawaii, your location could cause issues. You might not have enough money saved or enough income to accommodate the asking price for houses in your area even if you have zero student loan debt.

Lastly, think about your retirement plans and other savings goals. How will a mortgage payment affect your savings, and what will you have to rearrange to accommodate the extra payments? These are critical questions that will influence your decision to purchase a home.

Keep an optimistic outlook

Even if you’re capable of buying a home with student loan debt, you have to decide whether it’s the best choice for your financial situation. A number of factors will inform your final decision, and you should consider all of them before you seek out a lender.

Set aside some time to review your credit score, debt-to-income ratio, and other relevant information. You’ll have far fewer issues in qualifying for a mortgage if you’re prepared to meet with your lender. With that in mind, allocate an afternoon to sorting out the details and managing the minutiae.

As mentioned earlier, it’s possible to qualify for a mortgage with student debt — as long as you’re properly prepared.

See if you qualify for a home loan today.

The post Qualifying for a Mortgage With Student Loan Debt first appeared on My Mortgage Insider.