Almost a third of first-time buyers received their down payment from this source

Saving a down payment is important when buying a home. A generous down payment can help you avoid private mortgage insurance – insurance you have to pay to protect the lender from foreclosure loss if you deposit less than 20%. You may also qualify for a better mortgage interest rate if you have a larger down payment, and you are much less likely to owe more on your mortgage than your home’s actual value.

However, it can be difficult to make a large down payment, especially since you will need tens of thousands of dollars to put down even if you are buying a relatively small home. That’s why it might not be surprising that many people didn’t end up paying their down payment on their own.

In fact, recent data from the National Association of Realtors shows that up to 32% of first-time homebuyers and 8% of repeat buyers received their down payment from a relative or friend in 2019. This money was either a gift or a loan.

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

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

Mortgage lenders require a down payment for many reasons, including wanting borrowers to have a financial interest in the home. For this reason, some lenders are wary when a down payment comes from a friend or relative, rather than the buyer themselves.

If you receive your deposit as a gift, let your lender know right away. As you move further through the mortgage closing process, they’ll want to see proof that you have the down payment money – and may want a record of where it came from. If it is offered to you, it is best if your lender knows it up front so that it can be taken into account by the mortgage underwriter, who assesses the risk of granting you a loan.

Most lenders will also want to make sure that a down payment offered is really a gift rather than a loan. As a result, the person giving you the money will most likely have to write a gift letter stating that there is no expectation of repayment now or in the future.

If you get your down payment as a loan from a loved one, things are different. This should be documented with the lender, and it will be taken into account when determining how much you can borrow, as lenders closely scrutinize your current financial obligations when they approve you for a loan.

Ultimately, with so many people now receiving a down payment from a friend or family member, lenders are well equipped to handle this and have processes in place. The key for homebuyers who take this approach is to inform the lender and make sure they have all the proper paperwork so that their offered or borrowed down payment does not cause them any problems during the buying process. of a house.

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About Matthew R. Dailey

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