Buying a home can prove expensive, and many home buyers don't necessarily have a lot of money saved up for making a down payment.
However, most lenders aren't particularly interested in taking risks on unqualified borrowers, so there is a need to prioritize saving up for a sizeable down payment.
Thus, home buyers may turn to their friends, family, or other sources to try to make up the difference.
Whether or not you can use family money to make your down payment depends on a number of different factors. Let's take a look.
The Amount Of Money
The amount of money you can realistically receive as a gift to make a down payment on a home depends on the type of home loan you get, and may also be up to the discretion of the underwriter.
Deposits of any kind to your account - especially those over $2,000 - can come into question. Depending on the lender, smaller gifts may be ignored. However, keep in mind that anything out of the ordinary may need to be evaluated by the underwriter.
For tax purposes, gifts up to $14,000 annually per individual do not require you to file a gift tax return.*
The Type Of The Loan
When gift money factors into the equation, it may have an impact on the type of mortgage you can obtain.
With conventional loans, if you are making a down payment larger than 20%, it can all be from a gift. If you are going to be making a payment less than 20%, only part of the money can be a gift, and some of it has to come from your own cash reserves. The exact amount depends on the type of loan.
With an FHA or VA loan, all of your down payment can come from gift money. If your credit score is lower (in the 580 to 619 range), your down payment has to come from your own funds.
Gift Letters
If you know that any part of your down payment is going to come from gift money, the benefactor has to write a letter to the mortgage company explaining the nature of the arrangement (i.e. it's a gift and not a loan).
Don't be surprised if the lender requires further proof of the agreement, as this is standard procedure. This does not take away from the need to provide gift letters, however.
Borrowed Money & Gift Money
Borrowed money and gift money are going to be handled a little differently by underwriters. If you want to pay your family members back, it only serves to reason that a loan might be a more agreeable option.
Even so, the money you borrow has to be paid back. Lenders are going to factor this into your overall debt burden to determine whether or not they are willing to lend you what you need to buy your future home.
Conclusion
The issues addressed here are just a small sample of the different considerations that can affect using family money for down payments. This can be a complicated area to navigate, so seek out qualified professional help, and explore the different options available to you to come up with the best solution.
For more information
*Please consult a tax professional about your specific situation and the tax savings benefits of homeownership.
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