Is It True You Can Only Accept Gift Funds For A Down Payment From Family?

Posted on: 12 February 2018

One of the most challenging aspects of purchasing a home is saving up for the down payment. The good news is, you don't have to do it alone. People in your life can help you by contributing money towards your down payment fund. The bad news is, those monetary gifts can generally only come from family members. Here's more information about this issue.

Preventing Questionable Money Exchanges

All loans that will be guaranteed by a government program (e.g. FHA loans) or sold to a government entity (e.g. Fanny Mae) must adhere to certain money rules, and one of those rules is down payment funds must come from approved sources that can be verified by the bank. This is to prevent people from engaging in questionable money exchanges that may be against the law.

For instance, home sellers are not allowed to give money to buyers to encourage them to buy their homes, but some may attempt to circumvent this rule by giving the money to their friend to give to the seller as a down payment gift.

Thus, the government restricts who may gift funds to the buyer to a few groups:

  • Family members
  • Employers or labors unions
  • Charitable organizations
  • Government agencies

In some cases, an exception may be made for friends of the buyer if those friends can prove they have had a long and close relationship to the recipient. Money from your friend who you met in college and have known for years may be acceptable, for example, but cash from a person you met at book club six months ago typically won't be.

Possible Workarounds

Your friends can still give you money to help with your home purchase. You just can't use it as part of your down payment. However, you can use the money for other things, such as to pay for the home inspection, closing costs, and other fees associated with buying a house. You just have to make sure you obtain a notarized document from your friend stating they gave you the money for that purpose to show where the money came from and that it's not being use in an unapproved way.

Alternatively, you can use the money to pay other bills you may have and put the cash you would've spent in your down payment savings account. For instance, you can have your friend pay off one of your credit cards, and you can put the money you would've sent to the bank into your down payment fund.

To learn more about this issue or for assistance with getting approved for a home loan, contact a local lender.