Down Payment Help: Gift v. Loan

Mortgage101

Many first time homebuyers receive financial help from their parents to qualify for a mortgage. That’s definitely understandable in the wake of the mortgage meltdown as lenders require more money down. In fact, a recent National Association of Realtors survey found that between the years 2009 and 2012, roughly 25 percent of all rookie homebuyers used gifts from family or friends to finance their down payments. Another roughly seven percent of first-timers received loans from relatives to cover that big cost. While both forms can be accepted, it looks like gift rather than loans make it easier for borrowers to get approved.

When homebuyers bring loaned funds to the mortgage table, the bank will often view that as an extra debt burden even though the terms are more flexible with a family member than with a traditional lender. Banks may even add that loan to the borrower’s debt-to-income ratio, which could lower the amount of home for which they qualify.

Gifts can be an entirely different matter though. If the borrower receives money with no strings attached, banks are much more willing to accept it as a down payment. It is important to have it in writing that there is no expectation of repayment and to have proof that the funds have already been transferred to the borrower’s account. This takes the guess work of the process for the lender. “If one has prepared for the gift correctly, it really doesn’t impair the mortgage process at all,” said Bank of America senior vice president in north California and Oregon Edward J. Achtner in a Wall Street Journal article.

Borrowers should keep in mind the tax rules about gifts. They and their spouses can receive up to $14,000 from each parent before it becomes taxable income.

Even though gifts are preferable to family loans when it comes to down payments, banks still like to see the borrower contribute a healthy amount. That could be anywhere from five to ten percent of the loan amount. Lenders want to make sure that homebuyers have enough ‘skin in the game’ to be stable, responsible borrowers.

 

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