There are many rules and regulations when buying a home through a lender. For example, your lender needs to know the source of your down payment money. If you are considering giving or receiving any down payment assistance, here’s a breakdown of common rules and requirements.
What are down payment gifts?
A down payment gift is money that a buyer receives from someone else to use toward a down payment or closing costs during a home purchase. Down payment gifts do not need to be paid back.
Gift rules and gift letters
Different loan types have different restrictions on who can provide financial gifts, how those gifts can be used and how they need to be documented. Regardless of loan type, most lenders require a gift letter that documents the details of who is gifting the money, what their relationship is to the buyer and how much is being given. This letter also states that money does not need to be repaid and must be signed by the donor. Verification of sufficient funds and documentation of fund transfer is often required as well.
Conventional loan gift rules
Conventional loan lenders often allow buyers to use gift money for down payments, closing costs or financial reserves. However, sources of gift money are restricted to romantic partners and family members. Down payment gifts on conventional loans cannot be used for investment properties.
FHA loan gift rules
Federal Housing Administration (FHA) loans allow buyers to use gift money to pay for closing costs, mortgage expenses or down payments. Friends, family, employers and other entities can gift this money. In addition to a gift letter, you need to provide evidence of both withdrawal from the source account and deposit to your account.
In Canada, while the Canada Mortgage and Housing Corporation (CMHC) does not offer loans directly, they provide insurance for mortgage loans that can facilitate gifts for down payments. Like FHA loans, these gifts can come from various sources with proper documentation.
USDA loan gift rules
United States Department of Agriculture (USDA) loans offer unique benefits to buyers in rural areas by requiring zero money down on the purchase of a property. As such, gift funds aren’t often used toward a down payment for USDA loans, but it can be used to pay for some or all of the loan's closing costs. This money cannot be used as financial reserves to help you make mortgage payments. Gifts for a USDA loan can come only from family members, employers, a labor union, a charitable organization or a homeowners assistance program.
VA loan gift rules
Like USDA loans, you are not required to make a down payment when applying for a Veteran’s Affairs (VA) loan. You can use gift funds if you decide to make a down payment or would like to cover your closing costs. You can also use this money to pay for the funding fee that is often required with this type of loan. Almost any person can gift you this money.
In Canada, Canadian Forces members may have similar benefits, with provisions allowing gifts to cover various mortgage-related expenses.
If you are considering using a financial gift to purchase a home, speak with your lender about their gift rules before applying.
If you’re ever curious about local conditions or want to discuss how the latest trends can impact you, contact me at cflowers@woodsflowers.com.
