Coming up with a down payment can be challenging, which is why many homebuyers use down payment gifts to make gathering the large sum easier. The most common source for a down payment gift comes from parents or family, and down payment gifts can sometimes be the difference between someone being able to buy a home or not.

But using these financial gifts for your down payment isn’t as simple as depositing them in your bank account. Your lender will want to know where the funds came from and will require certain pieces of documentation to that end.

To understand why this is, we’ll first review underwriting and how it affects your loan. Then we’ll explain how to both give and receive a down payment gift, and who can give you a down payment gift in the first place.

Why the Source of Your Down Payment Gift Matters

Underwriting is the process by which your lender reviews your income, credit score, and assets to determine whether to lend you money. 

One of the steps in reviewing your assets is checking to make sure that the deposits in your account are indeed assets — not loans. The underwriter will be looking for any large irregular deposits (as opposed to regular deposits, such as your paycheck), meaning that any gifts from family and friends that you plan to use for your down payment will automatically raise a red flag.

This step is important to ensure that you can afford to repay your loan. If you had to take out a personal loan to make your down payment, you could struggle to pay them both back when the time arrived.

[Related: Why Waiting to Save a 20% Down Payment May Not Be the Right Move]

To prove that the deposits in your account are gifts and not loans, you’ll have to provide the underwriter with a gift letter. Keep reading to learn what this entails.

How to Give and Receive a Cash Down Payment Gift

Three steps are necessary when you accept a down payment gift, regardless of the type of loan you’re applying for. Follow these steps for every down payment gift you receive independently — do not combine multiple gifts in one process.

1. Write a Down Payment Gift Letter

The first step is to have the gifter of the funds write a down payment gift letter. The gift letter should include:

  • The donor’s name, phone number, and address
  • The donor’s relationship to the loan applicant
  • The date on which the funds were transferred
  • The exact dollar amount of the gift
  • The street address of the property being purchased
  • A statement from the donor indicating that the funds are a gift and repayment is not expected
  • Signatures and dates from all parties

Note: Your lender can also provide you with a standardized gift letter that you can use.

2. Document the Giving of the Down Payment Gift Funds

The next step is to leave a clear paper trail for the gift funds.

This starts with the gifter documenting where the funds came from in the first place. For example, if the gifter sells personal stock to come up with the gift money, they should document both the sale of the stock and the transfer of the funds from their brokerage account into their bank account.

Then the gifter should write a check to the homebuyer. Ensure that the dollar amount on the check matches the dollar amount specified in the gift letter exactly. Make two photocopies of the check — one for the gifter’s records and one for the homebuyer to show the underwriter.

Note: Writing a check is preferred over wiring funds because it is easier to document and track, simplifying the review process for the underwriter.

3. Document the Receipt of the Down Payment Gift Funds

After you have the check ready and documented, go to your bank to deposit it in-person. Do not deposit the check using an app or ATM machine.

Make sure the bank account that you deposit the gift funds into is the same account from which you’ll draw all of your money at closing. Taking money from multiple accounts at closing will make the paperwork more complicated for your lender.

Get a receipt for the deposit. The dollar amount on the receipt should match the dollar amount specified on your down payment gift letter exactly, so don’t make multiple deposits in the same transaction. The lender will likely reject your down payment gift letter and the associated funds if the amounts do not perfectly match.

Who Can I Accept a Down Payment Gift From?

Guidelines on who can offer you a down payment gift vary depending on the type of loan you’re applying for.

Conventional Loans

The down payment gift typically must come from family if you’re applying for a conventional loan through Fannie Mae or Freddie Mac. For mortgage purposes, the following people are considered family:

  • Spouse
  • Fiance
  • Domestic partner
  • Child (including adopted, foster, and step)
  • Sibling (including adopted, foster, and step)
  • Parent (including foster and step)
  • Grandparent (including foster, step, and great)
  • In-laws (including brothers, sisters, parents, grandparents, and aunts/uncles)
  • Aunt and uncle (including step and great)
  • Cousin (including adopted and step)
  • Niece/nephew (including step)

Fannie Mae also allows gifts from future in-laws.

FHA Loans

Federal Housing Administration (FHA) loans allow almost all of the family members listed above (including future in-laws) to give you down payment gifts, except for nieces, nephews, and cousins.

However, in addition to family, the FHA does allow close friends with an obvious interest in your life to give down payment gifts. This could include nieces, nephews, and cousins and even former spouses.

The FHA also permits gifts from:

  • Charitable organizations
  • Labor unions
  • Employers
  • Government agencies and public entities that offer homeownership assistance to first-time and low- to moderate-income homebuyers

[Related: Mortgage Options With Low (Or No) Down Payments]

USDA and VA Loans

The United States Department of Agriculture (USDA) and Department of Veterans Affairs (VA) allow down payment gifts from anyone as long as they aren’t an interested party, meaning they can’t be directly or indirectly involved in the real estate transaction. Interested parties include, but are not limited to, the:

  • Real estate agent
  • Seller
  • Developer
  • Builder 

Need Help With the Down Payment Gift Process?

The down payment gift process isn’t overly complicated, but it does have to be followed exactly in order for your lender to accept the funds. A minor mistake could mean rejection of your down payment gift funds and precious time added to the loan application process.

To ensure that everything goes right the first time, work with a mortgage broker who knows the ins and outs of down payment gifts. Seattle Mortgage Planners is happy to answer all of your questions and walk you through the entire process. Schedule a consultation today to get started!

Featured image via Unsplash

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