Buying a home is the “American Dream.” With home prices seemingly going up yearly, the biggest hurdle to buying a home is a sufficient down payment. From the first quarter of 2013 to the first quarter of 2023, the average home price increased from $307,400 to $516,0001. Seeing the rise in home values over the last decade, it’s easy to understand why many Americans find it difficult to save for a down payment.
The good news is there’s a solution. And that solution is a down payment gift.
What Is A Down Payment Gift?
A down payment gift is when someone provides money to a homebuyer to be used as the down payment (or part of the down payment) for purchasing a home. The funds are a gift, so they do not need to be repaid.
Lenders have specific underwriting guidelines for down payment gifts. And the person(s) providing the gift must adhere to those guidelines, which include providing a gift letter.
Down Payment Gift Underwriting Guidelines.
When it comes to a down payment gift, different loan programs have specific guidelines. Below is a general overview of the most popular loan programs and the universal underwriting guidelines associated with a down payment gift. Also, see the FAQ section for additional information.
Conventional (Conforming) Home Loans
When it comes to Conforming home loans, the person providing the gift must be an immediate relative. Parents, grandparents, siblings, or children are all accepted. Using your fourth cousin might not work, so stick to immediate family members.
If the total down payment exceeds 20% of the purchase price, the person giving the gift can provide the entire down payment. For example, if you buy a $500,000 home and the down payment is 25% ($125,000), the gift can be for the entire $100,000.
If the total down payment is less than 20%, then you will need to provide 5% of the down payment. For example, the purchase price is $500,000, and the total down payment is $50,000 (a 10% down payment). Under this scenario, you would have to put down 5.00%, and the person donating the gift would put in the other 5.00%.
Conforming loans require at least a 3.00% down payment.
Conventional (Jumbo) Home Loans
As for Jumbo home loans, this can get a bit tricky. Generally speaking, most Jumbo home loans have some sort of gift down payment program. Since there isn’t a standardized underwriting guide for Jumbo home loans, the guidelines for a down payment gift will vary from lender to lender.
The best thing to do under the Jumbo home loan program is to talk with the loan officer to find out their specific guidelines. Typically, the minimum down payment for Jumbo home loans is 10%.
FHA Home Loans
The FHA home loan program is very flexible regarding down payment gifts. Almost anyone you know can provide it, including family members, friends, and co-workers (there must be a relationship between you and the person giving the gift).
As a bonus, the FHA home loan program allows a company, labor union, or charity to provide a down payment gift.
The minimum down payment under the FHA home loan program is 3.5%
VA Home Loans
Did you know the VA home loan program does not require a down payment? But if you have a gift down payment, that is allowed, and anyone can provide the gift. Like FHA, the VA home loan program is flexible regarding a down payment gift.
USDA Home Loans
Family members, friends, and charitable organizations are all eligible to provide a gift under the USDA home loan. But like the VA home loan program, the USDA home loan program does not require a down payment. And the person, or charitable organization, can gift the entire down payment.
Be sure to check with your loan officer what their down payment gift underwriting guidelines are before you complete your loan application. Also, when it comes to having a gift down payment, there are no credit score and no debt-to-income ratio requirements associated with a person giving a gift down payment.
Bank Statement Mortgage Loans
For the most part, Bank Statement Mortgage loans do not allow for a down payment gift. However, it doesn’t hurt to ask your loan officer if they allow a gift for the down payment.
When someone gifts you a down payment, the underwriting process is very similar to a loan application that does not have a gift down payment. The main difference is documenting the gift and there are three main things an underwriter wants when reviewing a loan application with a gift down payment;
- Who is providing the gift
- Where is the gift coming from
- A signed and dated Gift Letter from the person donating the gift.
Down Payment Gift Letter Example
Here is a down payment gift letter example. Please consult with your loan officer about what your specific down payment gift letter needs.
RE: Down Payment Gift
To Whom It May Concern,
Mary Q. Public and John Q. Public of (use full address) are the parenets of (name of borrower) and plan to contribute $50,000.00 to help fund the purchase of the property known as (enter property address) which is under contract in the names of (primary borrower) and (co-borrower if applicable).
These funds are a gift and no repayment is expected. Funds will be wired from (enter bank information) and the account number is (enter account number) to the property escrow account (enter title/escrow company handling the closing) prior to closing on (enter date of closing).
(sign, date and enter full contact information for the donors including full name, address, phone number and email).
FAQ Down Payment Gift
Can I have more than one gift down payment?
Yes. Let’s say you are buying a home for $500,000, and your parents and a sibling want to contribute to the down payment of $100,000 (each providing $50,000). They would both provide a gift letter for the down payment.
Can I have a down payment gift if I buy an investment property?
No. A gift down payment is only allowed for primary and secondary homes.
Can a co-signer on the loan application provide a gift down payment?
Sometimes yes; it depends on the loan program. For example, if you are applying for a Conforming home loan and have a co-signer on the loan application, an immediate relative, that person can provide a gift down payment.
Is the down payment the same thing as closing costs?
No. A down payment is entirely separate from what you need for closing costs. A down payment goes towards the home’s purchase price, and closing costs are the cost and fees associated with the transaction (i.e., an appraisal).
Do I get taxed on the gift money?
Since tax laws change constantly, a tax professional is the only person who should answer this question. Please get in touch with your CPA directly to get the most up-to-date information.
Should the gift down payment funds be sent to the borrower or closing agent?
Most lenders want the donor to send the down payment gift directly to the closing agent.
Can you pay back a down payment gift?
No. If you repay the donor, it would no longer be considered a gift.
A down payment gift is a great way to help you buy a home. There are a handful of home loan programs that allow for a down payment gift, and most lenders offer these programs. It’s important you consult with your loan officer about the specific underwriting requirements and what information is needed in the gift letter. You’ll also want to consult your tax professional before moving forward with your transaction.
- Average Sales Price of Houses Sold for the United States: https://fred.stlouisfed.org/series/ASPUS