Family Gifts Can Ease Down Payment Woes

With Bay Area home prices soaring into the stratosphere, buyer wannabees are finding it increasingly difficult to come up with adequate downpayments. As a result, many seek help from their families. This is nothing new: my wife and I asked her parents for help getting into our first home over 40 years ago. It worked back then and is a viable option today as well.

As is the case with any home purchase, every penny must be accounted for: any funds that “suddenly appear” without proper documentation could derail your loan.

Money being provided by extended family members can qualify as part of a buyer’s downpayment but must follow strict guidelines. To begin, it must be a gift. If it is categorized as a loan, then it will be factored into the buyer’s debt ratio which could actually push the numbers over the acceptable limits and lower the qualifying purchase price.

All funds coming in as a gift must be fully documented in the form of a “gift letter.” The letter must specify the amount and the fact that repayment is not expected. Lenders can provide templates for buyers that can be filled out, signed by the applicable family members and then sent to the lender.

Differing loan programs also have different criteria that must be adhered to. As an example, FHA loans limit eligible sources of funding to relatives, close friends, charities, employers or labor unions. Conforming loans mandate that any gift funds provider be directly related, or by marriage, adoption or legal guardianship. VA loans are significantly less strict, allowing funds from almost anyone.

Surprisingly, many buyers do not know that gift funds are an option and so delay their purchases until they can manage to save up money on their own. This can be a Catch-22 scenario, as prices can often increase faster than a buyer’s ability to save adequate funds.

It is important to understand that, from the lender’s perspective, these funds must be categorized as a gift. In our case, once we had the gift funds in hand for our first purchase along with the accompanying gift letter, my father-in-law pulled me aside and stated, “You do understand we want this money back, right?” Bottom line, regardless of any arrangement you have with a gift provider, that stays between you and them.

Need help with your down payment? A gift may be the ticket to success.

Carl Medford is a licensed Realtor with Keller Williams Advisors and a licensed general contractor.