Thanks to Dallas mortgage lenders, anyone can now buy a home in Texas. But even if they can afford monthly mortgage payments, they might still find it challenging to arrange a down payment.
What is a down payment?
Down payment is the certain percentage of loan a homebuyer has to pay at the initial phases of acquiring a loan.
Now, imagine someone with zero savings looking to buy a home in Texas. Sounds challenging, right?
Fortunately, there are ways out there one can use to arrange down payment for their mortgages.
In this post, we’re going to talk just about that.
Using Gift Money for a Down payment
Yes, you read that right. You can use money from a gift to make a down payment. But there are certain guidelines you have to follow to prove the money you’re using to make a down payment came from legitimate sources.
The guidelines also depend on the type of loan you opt-in for. For example, if you have applied for a conventional loan, you have to follow different requirements than those who have applied for an FHA loan.
How Does it Work?
Your mortgage lender will ask for a few details before they allow you to use gifted money to make a down payment.
Remember, you can only use money gifted by one of your family members or friends or a government agency.
In the case of friends and family, they’ll need to prove they have a standing relationship with you.
Government-backed programs are usually designed to encourage first-time buyers to enter the real estate market.
Different Types of Loans and Gift Money
As mentioned above, different loan programs have unique criteria for using gift money. Here are some of the requirements with the most popular mortgage programs:
FHA loans
You need to pay at least a 3.5% down payment if you’re applying for an FHA loan. That means you can use your gift money to pay the minimum down payment requirement on your loan.
Conventional loans
Those looking for a 20% down payment option via conventional loan can use up to 100% of their gift money to make a down payment.
VA loans
VA loans may come with or without down payment requirements. But if there’s any down payment requirement, you can use your gift money to make that payment. Plus, you can also use those funds to pay your closing costs.
Can You Pay Back a Mortgage Gift?
The short answer is no. This is what we call mortgage fraud which is not acceptable at any cost. Doing so may also put your loan qualification at stake. You don’t want that.
So try to be as honest as possible with your lender and share the exact sources from where you have received funds to clear your down payment.
Other Things to Consider…
Gift money needs to be documented
As discussed above, your lender will ask you to provide proof validating that the amount you’re using as gift money has actually been received from a relative or a friend.
For this purpose, they’ll ask you to submit a gift letter (which is basically a form provided by your lender that includes information about the gift money, your relationship with the donor, and a statement highlighting the amount doesn’t need to be returned or repaid).
Both recipient and giver need to sign that form.
Who can the giver be?
Lenders usually prefer a case where the donor has a close relationship with a recipient. In special cases, they also accept a gift letter from a close friend if you’re able to prove your long-term relationship and affiliation with that person.
Remember, you can’t accept gift money from your colleague or employee who’s trying to send that money in compensation for your regular salary, bonuses, etc. This will be considered an attempt to avoid tax and a crime by the relevant authorities.
Other tax guidelines
Speaking of the other tax guidelines…
- A relative (parent/sibling) can give you a fund of $13k per year. This amount is tax-free. In case both your parents are willing to give you this money, you can easily acquire $26k from both your parents
- Your spouse is eligible to receive money from your parents provided that they want to add his or her in their largesse. In that case, you’d be able to get $52k in total for you and your spouse
- You can even receive more money from your parents or siblings. But in that case, they have to pay tax on that money
- While recipients do not generally have to pay income tax on gifts, you must declare your funds if they exceed the stated limit
In a nutshell, gift money can be a great source to pay your down payment if and only if you have sufficient proof to validate your source. It is also recommended that you discuss your case with your mortgage lender as only they can tell you the exact solution and process fit for your needs.
