No down payment home loans for first time buyers
You
want to buy a house. You have a good job and a high
credit score, but
you don't have a down payment (or closing costs). Can you buy a
house without a down payment and no closing cost money? Maybe. All
of the popular mortgage programs allow "donors" to give you money
for the down payment and closing costs. Eligible "donors" include a
close friend with a clearly defined and documented interest in the
borrower (i.e. fiancé), relative, or a charitable organization (i.e. church),
municipality, or nonprofit organization as a gift.
The lender will require extreme documentation showing the money
transfer from the donor to the home buyer's bank account. Do
not accept cash from a relative or any other acceptable "donor",
because the lender is unlikely to recognize the gift money. The
money transfer must be made by check or wire transfer and the donor
must sign off on a lender provided "gift letter". If you need gift
money for the earnest money deposit, speak to a lender in advance of
the purchase to document the earnest money deposit.
TIP
If you're not able to find one "donor", try to find multiple donors
to meet the down payment and or closing cost requirement. If the
parent(s) will pledge 50% of the down payment, ask your brother,
sister, aunt, uncle, grandparent(s) to each pledge a portion of the
down payment and closing costs. Each donor will be required to sign
a separate gift letter and provide bank statements.
USDA Home Loan Down Payment
The
USDA home loan program was created by the United States Department
of Agriculture to help low to moderate income house buyers in rural,
under served areas in the United States buy homes. The USDA loan
does not require a down payment (100% financing) and the seller is
permitted to pay a large percentage of the home buyer's closing
costs. If the seller refuses to pay the home buyer's closing and
escrow costs, all (or part) of the cash requirement for closing can
be paid for by a close friend, relative, or a charitable
organization (i.e. church), municipality, or nonprofit organization
as a gift. The lender provided "gift" letter states that there are
no repayment arrangements and that all money transferred to the home
buyer is purely a gift to facilitate the purchase of the house.
The USDA requires the mortgage lender to document that the "gift"
money has been transferred to the borrower's account and show proof
of the transfer of the gift funds from the donor's account. The
lender may want a copy of the donor's canceled check or withdrawal
slip and the borrower's deposit slip. The donor may give the closing
agent a certified check for the amount of the gift when the money is
not transferred prior to settlement. The lender will require a copy
of that check (or a settlement statement) showing receipt of that
check from the donor.
The USDA also permits an unsecured loan from a bank, family member,
or credit union, or even a credit card cash advance. A word of
caution, DO NOT borrow money or obtain any money for eligible donors
without first speaking to a loan officer. Any cash transfers must be
documented carefully by the lender. Read more about
USDA Loans
Veteran Loan Down Payment
The
VA home loan has been around since the end of World War II to help
qualified veterans buy a house. The Veteran's Administration
does not require a down payment and the seller is permitted to pay
all closing costs on behalf of the veteran. Eligible "donors"
include a close friend with a clearly defined and documented
interest in the borrower, relative, or a charitable organization
(i.e. church), municipality, or nonprofit organization as a gift.
Read more about VA Loans.
FHA Home Loan Down Payment
The Federal Housing Administration (FHA) requires a modest down payment of 3.5% for a single family home or an FHA approved condominium. The down payment can be paid by the home buyer or can be paid for by a close friend (with a clearly defined and documented interest in the borrower), relative, or a charitable organization (i.e. church), municipality, or nonprofit organization as a gift. The donors may also pay any and all closing, prepaid and escrow costs. The mortgage lender will require a gift letter acknowledging the money transfer from the donor/giver to the home buyer. The lender will also require a bank statement from the donor's account acknowledging the source of the gift money and a also provide the lender with a withdrawal slip and an updated bank statement certifying the receipt of the gift money.
Conventional Loan Down Payment
The
conventional loan is a mortgage that meets the underwriting and
lending guidelines of the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Corporation (Freddie Mac).
The conventional home loans are (technically) not backed by the
Federal government. Fannie and Freddie permit donors to pay for the
down payment and closing costs for the home buyer, however, the
entire down payment of 20% is required for a no down payment
mortgage. Read more about
Conventional Loans
Down Payment and Closing Cost Assistance Programs
Many states, counties and cities have down payment and closing cost assistance programs. The best way to track down down payment and closing cost grant money is to call a HUD Approved housing counseling agency for information on available programs.
The Federal Home Loan Banks provides the grant money to applicants whose household income is at or below 80% of the area median income. See Federal grants for first time home buyers
Down payment gift tax implications
There is an IRS gift tax. As of 2015, a married couple filing a joint return can gift up to $28,000 to a child or other family member or give up to $14,000 to any one person without incurring the gift tax. The tax is paid by the person donating the money. Consult a tax professional for the tax implications of down payment/closing cost gift tax for complete information