Down Payment Assistance: Differences Between Gift Funds, Grants, and Loans
Paying the down payment is often perceived as one of the most challenging aspects of the home-buying journey. It's well-known that acquiring a home doesn't come cheap! However, you don't necessarily have to deplete your savings to afford the down payment. Other viable alternatives exist, including gift funds, grants, and down payment assistance programs.
All three options are detailed below to help you decide which suits your financial state as you traverse the home-buying process. Be aware that the regulations for these types of down payment assistance differ depending on state, region, and city, and are liable to alter at any given moment.
Gift Funds
Who doesn't enjoy receiving a gift, especially one that comes in the form of money? Be it for a wedding, graduation, birthday, or even just because you're a first-time home buyer, gifts from loved ones can ease the financial burden.
If you plan to utilize a substantial financial gift for your down payment, certain guidelines must be adhered to. The term "substantial financial gift" often refers to any sum that is more than half of your total monthly qualifying income in the context of conventional loans. If, for instance, your monthly income is $3,800, a substantial financial gift would equate to a single deposit equal to or greater than $1,900. The threshold for FHA or USDA loans is anything above 1% of the lower value between the home's purchase price or appraisal value.
During the mortgage loan application process, which includes 60 days of bank statements, lenders or underwriters will seek to understand the source of any large, unaccounted-for sums. These gifts can be readily clarified via a gift letter stating that the money is a gift, not a loan. It should contain the gifter's name, address, phone number, relation to you, amount gifted, and date of the gift. Proof of this gift may be required, so hold onto any receipts and statements.
However, there are restrictions on who can provide you with money for a down payment. For conventional loans, the gift must originate from a family member, encompassing everyone from spouses to step-aunts, adopted cousins, grandfathers-in-law, and domestic partners.
FHA loans expand the circle of gift-givers to close friends, employers, labor unions, and charitable organizations. USDA and VA loans accept gift funds from practically anyone, excluding individuals involved in the home transaction, such as the home's seller, builder, developer, or real estate agent.
Even though you are not taxed on the gift funds, the gifter might be, so consultation with a tax professional is advised. Your loan officer can further clarify the requirements of gift funds.
Grants
Down payment grants can bridge the gap between the amount first-time homebuyers can afford for a down payment and the remaining balance. Such grants are available through government bodies like the Department of Housing and Urban Development (HUD) and nonprofits like the National Homebuyers Fund.
Eligibility for these mortgage programs can vary based on the home price, geographic location, your income, and credit score. Certain grants are also available to individuals in professions such as law enforcement, firefighting, and EMT.
Reach out to your state, local agencies, and related professional associations to check if they offer any applicable grant programs. Your loan officer can also guide you on these programs' requirements.
Generally, grant programs provide this down payment assistance without the need for repayment. However, some programs may include stipulations like a recapture period, necessitating you to live in the home for a certain duration.
Loans
Down payment assistance loans are a diverse category with varied meanings. They can range from interest-free, forgivable loans to interest-free deferred-payment loans and even low-interest-rate loans. Eligibility for these programs could depend on income limits, approved geographic locations, the home's price relative to the median home price for the area, your ability to contribute towards your down payment, and more.
Down payment assistance homebuyer programs can be offered by:
Federal agencies
State agencies
Regional organizations
Community organizations
Charitable funds
Moreover, some programs provide the option to use these funds for closing costs.
Even though not all first-time homebuyers will be eligible for down payment assistance or be fortunate enough to have a generous relative, it's worth investigating all possibilities. Thoroughly considering all your options before investing your hard-earned money can offer peace of mind when it comes to down payments.
