Reader question: “My husband and I are planning to buy a house later in 2017. We don’t have enough money saved up for a down payment. Can we get down payment help from my parents, or from other family members? Is that allowed for conventional loans or just FHA?”
Yes, depending on the type of loan you are using, you might be able to get down payment help from parents or family members. The rules and requirements vary slightly from one mortgage program to the next. But the good news is that most types of home loans today allow for down payment gifts from parents, family members, employers, and even close friends.
How to Get Down Payment Help from Parents or Family
Here are the general steps you would take when getting down payment assistance from parents or other members of the family.
Step 1: Speak to a mortgage lender about it.
My advice is to start by speaking to a mortgage loan officer about the different programs that allow down payment help from parents. Both FHA and conventional loans allow for down payment gifts, and the rules are generally the same. But there are some differences when it comes to allowable sources of funds, how long the money needs to be in the bank, etc.
So a good first step would be to talk to a loan officer or mortgage broker about getting down payment help from parents. Tell them this is one of your primary concerns, and you want to know which programs allow it.
Step 2: The parent or family member provides gift money.
The mortgage industry term for this is a down payment “gift.” Once you’ve identified a mortgage program that allows for third-party assistance, or gifts, you could then have your parents provide you with the funds to put into your bank account.
It’s best to have the money deposited into your account sooner rather than later. Mortgage underwriters will want to see copies of your bank statements that show when the deposit was made. So the sooner you get it in there, the better.
The specific requirements for deposit verification can vary from one mortgage lender to the next, and also depending on the type of loan you’re using. That’s why I stress the importance of speaking to a mortgage company first, before you start making other arrangements.
Step 3: The parent or family member provides a gift letter.
The most important caveat here is that the money being donated by your parents or family member must truly be a gift. In other words, it cannot be a short-term loan from one family member to another.
When you get down payment help from parents, they must write a letter that says they do not expect any form of repayment. Your mortgage lender will probably require this, and the underwriter will look for it as well. This rule applies to FHA and conventional home loans. A gift letter is almost always required in these scenarios.
Step 4: The mortgage underwriter will verify the down payment funds.
It is the underwriter’s job to make sure that you, the borrower, meet all requirements for the type of loan you are using.
Underwriting requirements vary depending on the type of mortgage loan being used and other factors. But you can be sure that the underwriter will look at bank statements to see how much money you have in the bank, and how long it has been there.
Some mortgage companies have specific requirements for “source and seasoned” funds. Generally speaking, if the down payment funds have been in your bank account for at least a month — and they can be easily traced back to the source — you should be okay. But again, you will want to check on these requirements as early on as possible.
Step 5: Closing the deal.
The rest of the mortgage process continues just as it would with any other borrower, regardless of where the down payment money came from.
The home will be appraised, the underwriter will finish his review process, and you will eventually move on to the closing stage. This is where you sign all of the loan documents, tax documents, and other paperwork relating to the sale of the home.
The escrow company will ensure that everything is in order, and then send the signed and finalized documents back to the lender. Shortly thereafter, the mortgage lender will release the funds for the loan.
This is a basic overview of how to get down payment help from parents or other family members. In closing, I would reiterate the point that the specific requirements can vary slightly, based on the mortgage lender you’re using as well as the loan program. So you’ll want to speak to someone early on, to figure out what exactly you need to do.