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What Are Mortgage Down Payment Gifts?

Most first time home buyers use some type of mortgage down payment assistance or down payment gifts when buying their first home.


Without programs such as this, many first time home buyers would find it impossible to make that first purchase. Down payment gifts are heavily regulated. Since many first time home buyers are lacking funds, this makes down payment assistance programs useful.

So in this brief article I want to help you understand how they work. Try to put yourself in the shoes of the lender. When using down payment assistance or down payment gifts the lender assumes 100% of the risk. Lenders like to see the buyer have a state in the purchase.

So then, when a buyer obtains down payment assistance, which in some cases could cause the loan to value to be 100%, this makes the lender nervous. I'm sure you can see why since you have no real investment in the property.

If this type of mortgage down payment assistance was not regulated, there could become a lot of loan sharks out there. That is why the only proper way for this type of help to work is it has to be a gift. Now you may be wondering, how can I get a gift like this?

All FHA loans allow for down payment assistance for first time home buyers. The gift for the down payment can come from an immediate family member, a relative or a charity. In all cases, there has to be documentation that this is a gift and not a loan. This establishes for the lender a guarantee that you have a small interest in the property. That interest of course is equal to the gift which was used as the down payment.

Now, in the case that a family member or relative cannot help you with the down payment assistance, we can use a charity. However, it is not exactly the same as if you had gotten a gift from a family member.

So then, if we do not have a family member that can help and if we have a problem finding the charity, we can ask the seller to offer the down payment assistance. There are charities out there that will use the seller's proceeds as the down payment assistance for you.

It works kind of like this, the seller makes a donation to the charity and the charity then makes the down payment for you. Now you may wonder, how can this actually be? Do you mean that the seller is going to make my down payment? No, that is not actually what takes place. The seller makes a charitable donation and the charity makes a gift to the lender equal to the amount of your down payment.

There will be a gift letter involved from the charity stating that you do not owe them any money. This gives the lender what they want, and it gives you what you want.

The only way that this can work is if the down payment gift, which actually is equal to about 3% of your loan amount can be factored into the sale price of your home. So this means the seller is actually taking a little bit less for the home, in order to make the donation to the charity, who then gives the money to the lender.

Now I realize that this type of mortgage assistance program may not make a lot of sense to you. All you need to know as a first time home buyer, is that your down payment gifts are in place and are legal.

I do not know any other way to explain this other than it is what I call a legal way to launder money! As the buyer of a home, you know you need to make a down payment, so this type of mortgage down payment assistance program is available to you.

by: Jeffrey S. Ragan
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What Are Mortgage Down Payment Gifts? Curitiba