Personal Finance Advice

If you’re thinking about buying a home because of the recent tax incentives then you may be trying to pull together a down payment that is substantial enough to get you approved for a mortgage loan at a decent interest rate. Unless you are able to obtain a loan guarantee through the Department of Veterans Affairs then chances are you’ll have to come up with some form of a down payment. In most instances you’ll need a 20% down payment in order to avoid additional Private Mortgage Insurance monthly premiums, although with an FHA guarantee or creative financing you may be able to put down less and still get approved.

Where should the money come from? Ideally you’ll have the money saved up and sitting in an interest-bearing savings account that is not your emergency fund. In other words, making the down payment on a home should not wipe out your savings altogether because you’re just asking for future financial trouble and may not be able to get approved for the mortgage loan in the first place.

If your solution is to have a friend or family member gift all or a portion of the amount you need for your down payment, you should realize that this is not a clear-cut solution. Mortgage lenders aren’t solely concerned with your ability to qualify for a mortgage loan, but are also concerned with your ability to keep paying the loan throughout the full amortization.

Here are some things you need to know about using a monetary gift as your down payment on a home:

Documentation: The mortgage lender may require the person gifting the money to you to sign a contract stating that there is no repayment expected.

Disclosure: Don’t think that you can just pop your gifted down payment into your savings account and not have the lender want to know where the money came from. Remember that lenders will often ask for bank account statements for the past few months. 

Taxes: If your parents or someone else gift you a certain amount of money you may wind up causing them some tax problems. Be sure to check with the IRS to make sure you don’t exceed financial limitations for monetary gifts, and if you do, then be prepared to deal with the consequences at tax time.

If you have questions about allowable monetary gifting for mortgage down payments, speak to your lender to find out how much you can receive without disturbing your loan approval.