Gifted Down Payment: The Bank of Mom and Dad
In this article, we’ll look at using gifted funds to purchase real estate and common mistakes to avoid.
What are Gifted Funds?
Gifted funds are a non-repayable amount you receive from an immediate family member that you intend to use towards the down payment (and sometimes the deposit) to purchase a home.
Pretty much all lenders are ok with gifted funds. There’s a term for gifted funds received from parents: “the bank of mom and dad.”
Lenders will want your family member to sign a gift letter and see that the gifted funds have been deposited into your bank account. The lender will sometimes ask for bank statements from your family member to confirm the source of funds.
Can I Receive My Entire Down Payment as a Gift?
Yes, you can receive your entire down payment as a gift. As long as you can qualify for the mortgage otherwise, with your income and credit score, most lenders are okay with your entire down payment being a gift. (This includes your deposit, which is part of the down payment.)
However, most lenders would like to see that you’ve saved at least the closing costs. Lenders typically want to know what you have saved at least 1.5% of the purchase price to cover closing costs. If you don’t even have the closing costs saved, that’s when lenders maybe a little hesitant to extend you the mortgage.
It’s a good idea to save at least closing costs. That way, you’ll have many more mortgage options at your disposal.
Common Mistakes to Avoid
Let’s finish off this article by discussing some common gifted down payment mistakes to avoid.
Lenders will want the family member giving you the gift to sign a gift letter confirming that the funds you’ll be receiving are a gift and don’t need to be repaid. However, if your family member isn’t willing to do that and instead says it’s a loan, it will have to be factored in as debt and it will likely not help improve your purchasing power much, if at all. It could actually reduce it.
When receiving gifted funds, ask your family member to ideally make one deposit. If there are several deposits, it will be a lot harder for the lender to track and could delay the approval process. It’s best to go with one deposit over many.
From Borrowed Funds
The gifted funds must be from your family member’s own resources. This includes savings, investments and even a HELOC. However, it shouldn’t be borrowed funds, such as an unsecured line of credit.
It’s best to mention this to the family member generous enough to give you the gift, to avoid any issues later on with the mortgage lender.
From Non-Immediate Family Members
The lender almost always wants the gifted funds to come from immediate family members. This include your parents and siblings. This sometimes include grandparents, depending on the lender you’re working with.
Unless you’re working with an alternative lender, this almost never includes aunts and uncles. Make sure you’re aware of this because you don’t want to run into issues receiving the funds when you have an accepted offer on a home.
Money from Overseas
Lenders typically want to see the funds deposited into your bank account from a foreign source at least 90 days before closing. If the gifted funds arrive in your account in less time, that’s when you can run into problems with lenders.
The Bottom Line
Gifted down payments can be a useful tool to reach homeownership sooner when done right. Reach out to our experts today to help make a plan for your gifted funds, so you can avoid any issues later on.