I have helped several buyers this year, and the subject came up if the down payment for a home can be borrowed from a family member or margin type of account. Unfortunately, the down payment for a home must present in a bank account and be a liquid asset (cash in bank). Down payment funds cannot be borrowed. All down payments used for a home purchase must be in borrower’s most recent bank account.
If non liquid funds are in an investment account, the lender will require a paper trail to show the proof of liquidation plus proof of deposit into borrower’s liquid bank account. This would include stocks, mutual funds, or use of IRA funds which are subject to early penalty fees plus ordinary income tax. A borrower can also exercise stock options, but borrower will be required to show copy of transaction and a paper trail showing the sale and deposit of funds.
Any large non payroll deposit must be documented. Lenders will scrutinize any large deposit made into the borrower’s checking account. This includes gifts and sales proceeds from selling personal or real property. If borrow sells a car or commodity like gold/silver, the lender will require a bill of sale and proof of deposit. It is also a good idea to have both parties sign the bill of sale.
A borrower can use an employer sponsored 401K for a down payment. However, the lender will require borrower to provide the employer’s policy for withdrawing funds. For example, the employer may limit the amount of funds that can be withdrawn from employee’s account. Most 401K withdrawals are setup as a loan, and the borrower must pay back within a certain period of time. The monthly debt will be counted towards the borrower’s debt ratios. So make sure you can support the additional monthly debt and still qualify for the mortgage. There can also be consequences if loan is not paid back in full and borrower has a change in employment.
Gifts can also be made for home buyers. Rules vary depending on type of mortgage. Borrowers applying for an FHA mortgage can receive a gift for 100% of their down payment and or closing costs. Borrowers who apply for a conventional mortgage must have at least 3%-5% of their own down payment seasoned in their personal bank account. The person or donor gifting the money to the borrower will be required to issue a letter stating the amount of the gift, the relationship of the person they are giving the gift to, and the gift will not be a loan or be repaid. Lender will only allow gift funds for a primary residence. All funds used for an investment property mortgage must be the borrower’s funds and be seasoned.
There are also IRS rules and guidelines for gifts. The IRS allows a donor to gift $14,000 per year to an individual. Generally, the donor is responsible for paying any applicable gift tax unless special arrangements are made and donee agrees to pay tax instead.
If you have any questions, please call us at 512-257-9836. Our office provides sales, leasing, property management, and mortgage services