NJ Mortgage Down Payment Help: The Family Gift Option

You’re ready to buy your first home but lack a sufficient down payment. With a stable income and a solid credit score, your lack of a down payment need not prohibit you from purchasing a home. There are several feasible financing options available, including a few you likely haven’t yet considered.

In addition to certain conventional loans, FHA loans and VA loans are programs that offer very low down payment options. It is also a common misconception that most conventional home loans require a down payment of at least 20% of the purchase price of the home. In most cases, you will still be able to purchase a home without the 20% down payment. The caveat with most conventional loans is that you may be expected to pay private mortgage insurance (PMI) to help protect the lender until you have obtained 20% equity in the home.

FHA and VA loans do not require private mortgage insurance and have low down payment options, but have more specific eligibility requirements. If you have parents or relatives who are financially secure and willing to help you with a down payment, consider asking them to gift you the funds. This may be the most convenient option of all. It is relatively simple and efficient to incorporate the family gift option into the processing of your mortgage.

Many different mortgage programs allow for a family gift option in the financing of your home as long as a few basic requirements are met. Conventional loans and FHA loans both typically allow for the family gift option.

Proof of relationship

While the funds gifted to you don’t necessarily have to be from a family member, if they are not from a close relative, you may have to prove that the relationship is a close one in order for the lender to accept the plausibility of them gifting you the funds. Make sure the contributor of your funds understands that they may be liable for a gift tax depending on the amount of funds they are giving away. It is always wise for your donor to obtain legal advice in this situation –  especially when gifting a substantial sum of money. When handled properly, they may actually be able to avoid any tax liability.

Signed proof of gifted funds

The lender will also require a legal document (this letter is customarily provided by the lender) to be signed by both parties that states that you will not be expected to repay your family member for any of the down payment funds gifted to you, and that it is truly a gift and not an interpersonal loan of any kind. This letter helps protect you immensely as a buyer.

Obtain funding from family

Once you have met with your lender and consulted with a NJ real estate lawyer to determine your best options, your donor will need write you a check for the funds to be deposited into your bank account. The mortgage underwriter will then make sure the funds provided by your family member are well-documented and that you can proceed smoothly with the rest of the financing process.

If you are fortunate to have generous family or friends to gift you a down payment, please let them know just how grateful to you are. It may be the most valuable gift you ever receive from a monetary standpoint, as well as a gift that will help to establish your financial security for the rest of your life.

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