If you're a first-time home buyer looking for your dream home, your real estate agent or property developer has probably already asked you, "How much will you be putting down?" You may be able to get a "No Money Down Mortgage" or "Zero Down Home Loan" if you have good credit, a steady income, and a long history of using credit wisely. But most first-time buyers need a down payment before they can buy a house, and getting 20% to 30% or more of the house's price from family or friends is a very common way to get that money. Getting that much money together can be hard enough, but lenders also want to know where every dollar used for a down payment came from. This can be especially hard when the money comes from a third party, which is why we have "Gift Letters."
Most newlyweds and young people don't have enough of a credit history or a steady income to qualify for 100% financing. They are also the least likely to have enough savings and assets that can be proven to pay for the down payment. In some ways, family members are the best and very often the only way for "green" borrowers to get help with their down payment. Your lender will usually only let you use money given to you by a true family member, like your mother, father, brother, sister, uncle, aunt, grandfather, grandmother, first cousin, etc. This means you can't use money given to you by people who aren't really family members, like friends or coworkers. However, you might be able to use money from a third party who isn't a family member if you can show proof of a very close and long-lasting relationship. This is mostly done to stop people from taking out personal loans that have to be paid back to get the money for their down payment, which could mess up their debt-to-income ratio, or DTI. Basically, they don't want you to take on more debt than they think you can pay back safely. If they thought you could, they would have given you 100% financing.
If you need to borrow money from your parents or other family members for a down payment on your new house, you will have to prove that you did not borrow the money with the intention of paying it back or with the expectation that you would pay it back. In fact, you and your family will need to show your lender that the money was given to you as a gift. Your lender will need special proof that the money is really being given to you for free.
When you apply for a new mortgage, you should get a special form called a "Gift Letter" as part of your loan application package. The goal of this letter is to let the lender know where the money came from and that it is a gift. Usually, a gift letter will include the name of the donor, the name of the recipient, the relationship between the two parties, the amount of the gift, the address of the property that the gift will be used to pay for, the fact that no repayment is expected or expected, and an assurance that the person making the gift or the source of the funds is not in any way a party or beneficiary to the transaction, such as the broker, seller, agent, loan officer, builder, etc. Most of the time, the person giving the gift will have to show proof of where the money came from, like a bank or brokerage account. If you are putting the money directly into escrow or into your bank account, make sure to keep copies of the checks or deposit tickets/receipts from the bank/escrow agent to prove that the money was moved.
