One of the most daunting prospects in the home buying process is coming up with enough money for a down payment – especially if you are a first-time buyer. But your Orange County, California real estate dream doesn’t have to die if you have friends or family who are willing to “gift” you money.
First, you have to prove that the money is yours, and really a gift.
Lenders don’t want to accept money from another party in the form of a loan – their concern is that you are being saddled with more debt than you can handle, putting their investment at risk. Therefore, you’ll need a formal letter that states that the money is a gift that is not expected to be repaid and shows where it comes from. Letters should include:
The monetary amount of the gift
The address of the property
The relationship between the giver and the buyer
A specific note that the money is not a loan to be repaid
From there, lenders will want proof that the money left the giver’s account and got to yours in one step – that helps them verify that funds exist and are coming from where you say they are. If you have gifters write a personal check to you, that leaves a verifiable paper trail that can be shown to lenders faster than a wire transfer.
You can use your down payment gift money for nearly any loan type, from FHA and VA loans to conventional mortgages. Because down payments for FHA loans can be as low as 3.5%, they’re optimal to cover with a gift payment. But gift money can also be crucial when it comes to getting a conventional loan. If you qualify for a 15% down payment, you’re still responsible for private mortgage insurance (PMI), and you may not be getting the best rates in the long-term. However, if you can use gift money to bump up your down payment to 20%, all of a sudden you’re not required to get PMI, and you’ll be eligible for better rates.