Ever think that you might need some outside help if you were ever to buy your first-time home?
You’re not alone here. The National Association of Realtors® Profile of Home Buyers and Sellers Report estimates that a quarter of first-time home buyers use gifts from family to make the down payment on a home.
The down payment often represents the single most important obstacle for aspiring homeowners to overcome. With a sizable down payment, you can achieve favorable terms from a mortgage. Without one, you risk taking out a loan with harsher terms.
A gift can change everything.
If you do get help from your parents or a relative, it’s important that you know how to manage using a gift as a down payment:
1. Be honest about the gift.
One of the first and most misguided mistakes a home buyer can make is being dishonest about the nature of the gift.
Yeah, don’t do that.
First-time home buyers might want to look good to a lender, so they’ll say they’re getting a “loan” from their parents for the down payment. Yikes.
Not only is this dishonest, but it can sometimes be a red flag for loan officers who are simply trying to get to the bottom of your current financial situation.
You should look for honesty in all sides, as well:
- Make sure that you have the gift amount in writing from the people giving it. The totals on the written statement should repeat exactly what shows up on the financial statements.
- Make sure you have the money in advance. Applying for a loan without the down payment ready to go can be problematic from a lender’s perspective.
If you find yourself taken by “house fever,” don’t let the promise of a gift allow you to get ahead of yourself.
2. Remember that there’s more going into this home than a down payment.
A new home purchase is fraught with all sorts of costs as you upgrade your lifestyle.
Furniture. Closing costs. Appliances. Landscaping.
The down payment is like the key to the home. It opens the door to the loan. But it’s not all you’ll ever spend on your home.
You’re still going to be responsible for this home and its long-term maintenance. While a gift for a down payment might open up the possibility that you can afford more house than you planned, you should still be sure that you’re not acquiring more mortgage than you know what to do with.
3. Use a “gift letter.”
A gift letter, complete with donor signatures, the amount of the gift, the date of the fund transferal, and other details that may be relevant for a mortgage company, will go a long way.
This isn’t to say that a mortgage company will move heaven and earth because you have a gift letter. But it does demonstrate that you are capable of making a down payment and may help you secure the mortgage of your dreams—as long as all of the other stars align as well.