Taking out a mortgage loan is costly. Most lenders require down payments of at least 5 percent. For a house with a final purchase price of $200,000, that comes out to $10,000. Then there are closing costs, the fees that your lender, title insurer and other providers charge. The Federal Reserve Board estimates that these costs can run from 3 percent to 5 percent of the price of your home. For that $200,000 home, that comes out to an additional $6,000 to $10,000. You can find some financial relief, though; lenders won't allow you to borrow money from family members to cover your closing costs. But they will allow you to accept a gift from family members -- that doesn't have to be repaid -- to cover your down payment. And you might be able to convince your sellers to pay for the closing costs.
Study your Good Faith Estimate to determine how much money you'll need to cover your closing costs. Your lender must provide you this itemized list of closing cost estimates within three business days after you apply for a mortgage loan. Once you have this form you'll be able to calculate how much money you'll need to bring to the closing table for both closing costs and your down payment. Be aware, though, that the Good Faith Estimate, as its name suggests, is not concrete. Closing costs can change slightly before you reach the closing table.
Ask your family members to write a gift letter if they are gifting you the money you need to cover your down payment. This letter should state exactly how much money your family members are giving you, the address of the property you are buying and the relationship of the family members to you. It should also state that these funds are a gift that you don't have to pay back. Lenders want to make sure that you can afford your monthly mortgage payments. They don't want you to be burdened with making these payments and paying back your family members, too.
Deposit the gift funds from your family members directly into the bank account that you will be using to pay any other costs associated with closing your mortgage loan. Do not use part of the gift money for any other purpose.
Provide your lender with the gift letter from your family at the loan closing. Sign any documents that your lender requires to officially transfer ownership of your new home from the seller to you.
- New York Times: To Givers of Down Payments
- The Mortgage Reports: How to Give and Receive Cash Down Payment Gift for a Home
- The Federal Reserve Board: A Consumer's Guide to Mortgage Settlement Costs
- ClosingCorp. "ClosingCorp Reports Average Mortgage Closing Cost Data for 2019," Pages 1, 3, and 4. Accessed August 15, 2020.
- U.S. Congress. "12 USC Ch. 27: Real Estate Settlement Procedures." Accessed August 15, 2020.
- U.S. Department of Housing and Urban Development. "Mortgage Insurance Premiums," Page 1. Accessed August 15, 2020.
- Consumer Financial Protection Bureau. "What Is Private Mortgage Insurance?" Accessed August 15, 2020.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.