​First Time Homebuyer Downpayment Solutions

By Josh Turpin

A decade ago 100% financing options were the norm for buying a home.  The thought was, why put any money down if you don’t have to?  Although there are pros and cons to putting money down, when it comes to buying a home nowadays, there are very few 100% financing options available. Typically there is a minimum down payment of 3.5% (for FHA loans).  This money has to be sourced and seasoned and cannot be borrowed.  That being said, there are some crafty ways to raise your down payment with little-to-no money out of your own pocket. 
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Using Gift Funds For a Down Payment
Not everyone has a rich uncle willing to buy them a home.  Likewise, most home buyers will need to use some sort of financing to buy their home. In this case, there are certain rules that apply to the funds involved in the transaction.  Making sure the funds are not borrowed in any way is one of those rules.  The money has to be gifted. 

Rich uncle aside, you might be surprised who may step up to the plate when it comes to helping you get into a home.  Quite often I have seen borrowers obtain money from a family member in order to pay for a minimal down payment.  Funds obtained by another entity to buy a home typically fall under the category of “gift funds”.  Most home loan programs allow gift funds as long as they are from one of the following types of entities:

• The borrower's relative
• The borrower's employer or labor union
• A close friend with a clearly defined and documented interest in the borrower
• A charitable organization
• A governmental agency or public entity that has a program providing home ownership assistance to low- and moderate-income families, or first-time home buyers.

 
One imperative requirement of gift funds is that they CANNOT BE A LOAN.  This means there can be no expectation of repayment.  This also means there will have to be a signed Gift Funds Letter that is a written agreement between the giver and receiver that states the funds are a gift, not a loan, and there is no expectation of repayment. It will need to be signed by both the giver and the borrowers.

Another requirement of the gift funds are that they need to be sourced and seasoned (just like any other money used when obtaining a mortgage).  This means the giver will be required to show where the money came from.  This money will also have to be tracked as it moves from their account to the closing transaction.  So, if they gift the money directly to the receiver, the parties will need to show the money coming out of the giver’s account and going into the receiver’s account.  This is why it is very important NOT TO PROVIDE GIFT FUNDS IN THE FORM OF CASH.  Therefore, if the giver is sitting on a ton of “mattress money,” they will need to deposit the money into their bank account, let it sit there for at least 30 days, and then gift it to the home buyer. 

One way to avoid having to go through the pain of showing all of these transactions is for the giver to pay the funds at closing directly to the title company. They will still have to source it by showing an account statement but there is less paperwork to provide.

Remember, when buying a home, you have to consider not only down payment but also closing costs and pre-paid items.  Such closing costs will include lender fees, title charges, the cost of an appraisal, and other various fees.  Prepaid items include setting up an escrow account to pay taxes and insurance when they come due.  These items add up quickly.  For a low down payment program, these costs can even exceed the amount of the down payment.  See my article, “How to Avoid Paying Closing Costs When Buying a House,” for more information on how to avoid such out of pocket costs.

Regardless of whether you pay the down payment or closing costs out of pocket or raise it via another means, it is important that the financing you do obtain is competitive.  That is where I step in.  Contact Me to obtain a free, no obligation, quote on for your next home purchase loan!

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