Can you borrow money for your down payment?

Saving for a down payment is one of the hardest parts when it comes to buying your first home. Although lenders do not typically allow you to borrow money from someone else, you can get a gift from a relative. In fact, about 25% of first-time homebuyers get help with a gift from a relative as part of their down payment. There’s nothing wrong with this, but there are some regulations you need to consider as you plan for the big purchase. First, you need to know if your lender and type of mortgage will allow you to use a gift as part of your down payment. With many loan programs, a down payment gift isn’t an issue, but with some mortgages, you may need to prove that you’ve provided most or all of the down payment yourself.

Mortgage programs created with first-time homebuyers in mind, like the FHA loan and VA loan, as well as many state and local programs, allow a significant portion of the down payment to come from a gift. For an FHA loan, for instance, all of your down payment can be a gift from a relative.

With a conventional loan, things get trickier. Most conventional loans, depending on the lender, require a 10%-20% down payment. Of that down payment, a lender may require that some portion, often around 5% of the home purchase price, is provided by you and isn’t a gift.

With that said, limits on down payment gifts vary from one lender to the next. If you’re planning to use a gift for some of your down payment, you should talk to your lender about its rules before you proceed.

Why gifts invite scrutiny

Because a mortgage is the largest loan many of us will ever take out, lenders are cautious about making them. That’s why you have to prove your income source and amount, debt-to-income ratio (DTI), and other financial data. It’s also why down payment gifts may invite scrutiny from potential lenders.

One of the main reasons lenders will require clear documentation of a down payment gift is that they want to make sure that the gift isn’t actually a loan. Lenders need to guarantee, for their safety, that you aren’t taking out another loan disguised as a gift. Additionally, some lenders accept second mortgages and so they need to know if your down payment is coming from such a loan, rather than a gift, in order to accurately calculate your DTI.

For these reasons, lenders will require some serious documentation noting exactly where a down payment gift comes from, including a letter from the giver, and probably even some bank records from the giver.

The process of using a down payment gift

With all that said, using a down payment gift isn’t impossible and is, in fact, a common enough practice. Here are the steps you’ll need to take to make it happen:

1. Ask only family members. Gifts from friends, neighbors and co-workers won’t be accepted, but gifts from siblings, parents, grandparents, or aunts and uncles are usually acceptable.
2. Get a letter. The giver will need to write you a letter with the details of the donation, including the exact amount, the property the gift is for, and your relationship with the giver. The giver will also need to explicitly state that the money is a gift and doesn’t need to be repaid.
3. Gather documentation. You may also want to have the giver gather documentation showing their ability to give the gift. Whether they withdraw the amount from savings or cash in some stocks, a proper paper trail will help ensure that their down payment gift is accepted.
4. Record the transaction. There are a couple of acceptable ways to record the transfer of money between the giver and yourself. One is to have the giver transfer the exact amount in a wire transfer, keeping all documentation. The other is to ask for a check and to put the entire check in your home savings account at one time, getting documentation from the bank teller.
5. Keep all money together. One important key to successfully using a down payment gift is to keep the money together until you write your check to the lender. Have a separate account for your down payment savings and only deposit the exact gift amount in one transaction so that you can save the records. (In other words, don’t put a check from your grandma and a check from a freelance client into your savings account at the same time. Run these as separate transactions so there aren’t any questions about which money was grandma’s.)
6. Deposit the money a few months in advance. One way to avoid some of the more intrusive scrutiny from lenders is to season the down payment money by depositing it into your account a few months before you go home shopping. You’ll still want to keep documentation, just in case. But most lenders will assume money that’s been in an account for three months or more to be yours and may ask no questions.

Information for the giver

As you’re talking with a family member about the possibility of using a down payment gift, be sure that family member considers federal gift tax regulations. If you get a very large gift from a family member, that giver may need to pay a special tax on the amount.

In 2015, up to $14,000 per recipient per year can be excluded from the gift tax. This means that if your grandparents, as a couple, want to give you a large down payment gift, they could provide $14,000 each to you without paying a gift tax. If you’re married, they could give another $14,000 each to your spouse, for a grand total of $56,000.

Because most of us won’t be getting this much money toward a down payment, most of us don’t need to worry about this. But it’s something to be aware of before you accept a gift for your down payment.

Buying a home is much easier when you have a bit of help, especially when it comes to saving for a down payment. With these tips, you can use a gift as part of your down payment with no problems.