Almost a Third of First-Time Home Buyers Got Their Down Payment From This Source

by Christy Bieber | Published on Aug. 13, 2021

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A family carries various furniture into their new house.

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The source of funds may surprise you.

Saving up a down payment is important when purchasing a home. A generous sized down payment can help you to avoid private mortgage insurance -- insurance you have to pay for to protect the lender from losses in case of foreclosure if you put down less than 20%. You can also qualify for a better mortgage interest rate if you have a larger down payment, and you are far less likely to end up owing more on your mortgage than your home is actually worth.

It can be a challenge to actually come up with a large down payment, though -- especially since you'll need tens of thousands of dollars to put down even if you are buying a relatively modest home. That's why it may not come as a huge surprise that many people didn't end up coming up with their down payment on their own.

In fact, recent data from the National Association of Realtors indicates that as many as 32% of first-time buyers and 8% of repeat home buyers got their down payment from a relative or friend in 2019. This money came as either a gift or a loan.

The fact that so many people are getting a down payment from an outside source, rather than saving it themselves, has some serious financial implications.

How a down payment gift or loan could affect your home purchase

Mortgage lenders require a down payment for many reasons, including the fact that they want borrowers to have a financial interest in the home. Because of this, some lenders are wary when a down payment comes from a friend or a relative, rather than the home buyer themselves.

If you are getting your down payment as a gift, disclose this fact up front to your lender. When you move further into the mortgage closing process, they are going to want to see proof you have the down payment money -- and may want a record of where it came from. If it's being gifted to you, it's best your lender knows this from the start so this can be taken into account by the mortgage underwriter, who assesses the risk of giving you a loan.

Most lenders are also going to want to make sure a gifted down payment really is a gift, rather than a loan. As a result, the person who is giving you the money very likely will need to write a gift letter specifying that there is no expectation of payback either now or in the future.

If you are getting your down payment as a loan from a loved one, though, things are different. This needs to be documented with the lender, and it will be factored in when determining how much you can borrow since lenders take a close look at your ongoing financial obligations when approving you for a loan.

Ultimately, since so many people are now getting a down payment from a friend or family member, lenders are well-equipped to handle this and have processes in place. The key for home buyers taking this approach is to let the lender know and make sure they have all of the proper documentation in order so their gifted or borrowed down payment doesn't cause them problems during the home-buying process.

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