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Using Money From Family for Your Down Payment

Money in hand Home buyers who are a little short on cash sometimes ask, “Can I get a loan from a family member to help with my down payment?”

Or, “Can I take a cash advance on my credit card to help with my down payment?”

The answer to both questions is no. Your down payment must be either your own money or gift money from family or grant money from an acceptable source. No part of your down payment can come from a loan, not even from your mom. No exceptions.

If a family member is providing cash toward your down payment, then they will need to sign a form letter stating it is a gift and no repayment is required. Usually, they also need to show the source of their gift money by providing a bank statement(s) or other document such as investment statement.

Why can’t you take a loan from your parents for a down payment? Because the lender thinks that if you get into financial trouble and have to make a choice between paying mom and dad or the mortgage bank, your family ties will be stronger and the bank will lose out. Therefore, it is an unacceptable risk to lending. The bank is not going to take “second position” behind your family.

Any other loan, such as a cash advance from a credit card, is also unacceptable. This would affect your debt ratio as well as put the bank at a higher risk for getting paid.

For a small down payment of only 3.5 percent of the purchase price, look at the FHA loan. FHA allows all of your down payment to be gift money from family.

If you are eligible for a VA loan, you may qualify for a zero down loan.

The no-down sub-prime loans of yesteryear are gone, and I think that’s a good thing. It takes time and discipline to save for a down payment and closing costs, and that’s not a bad thing either.

Using Gift Money For Your Down Payment

kitchen counter top view No money for a down payment? If you have a family member who is willing and able to give you the funds for a down payment, you may be in luck! Here’s how it works.

Who Is Allowed to Gift Money

Gift money may come from a family member. Some lenders will stretch that to include a fiance/fiancee. Friends are not allowed to gift the down payment. Why? Because lenders believe that your parents, a grandparent, or even a brother or sister would give you cash without expecting it to be returned. But a friend? No, lenders don’t think friendship stretches that far, and that it would actually be a secret loan. Remember, borrowed money cannot be used for a down payment.

What the Gifter Has to Prove

Lenders have a form Gift Letter that the person donating the funds must fill out and sign. In addition, they have to prove “ability to give.” This is done by providing two months’ bank statements showing where the gift money is coming from. Why? So the lender knows the person gifting the money isn’t taking a cash advance from a credit card or some other type of loan. Again, no borrowed money allowed for down payments.

I once had a home buyer tell me her dad said, “I am not showing them how much money I have in my account. You tell them I am not giving my bank statement! The letter is sufficient.” Well guess what? The loan was suspended by the underwriter until the dad decided to cough up the bank statements.  You can’t bully an underwriter into changing the rules, so you’ll want to let your donor know up front you will need copies of the bank statement later.

How to Execute the Gift for the Smoothest Closing

Do not have your donor transfer their funds into your bank account. This will cause a big, complicated paperwork mess that you don’t want to deal with. Instead, have them sign the letter that your loan officer provides and have the statements ready. Your loan officer will instruct you how and when your donor should transfer the funds and where. Typically, the donor can have the money wired directly to the escrow closing agent or closing attorney–the neutral third party who handles all disbursement of funds.

How Much Money You Need

For an FHA loan, the down payment is 3.5% of the purchase price. Gift money may cover all or some of that. If you have some money of your own but not enough, you can receive a partial gift.

If gift money will cover all of your down payment and if the seller will pay all of your closing costs, then you, the home buyer, will need only the appraisal fee (about $450) and two months’ total house payment (including principal, interest, taxes, insurance, and mortgage insurance) in reserves. This means you need to show that you will have two months’ payment left in your own bank account after your loan closes. Lenders will not fund your loan if you will be left with only a few dollars in your account afterward. That would be too risky for them and unwise for you.

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