Wedding Gifts, Graduation Gifts, and Other Little-Known Down Payment Strategies

Until now, mortgage lenders required a down payment gift to come from a family member or at least a close friend.

But a major lending agency has changed the rules. Down payments can now come from wedding gifts, graduation gifts, and other interesting sources. Here’s what to know.

Use Wedding Gifts Toward Your Down Payment

Newlyweds now have an advantage when buying a home. They can use cash gifts received for their wedding toward the down payment on a home.

Lenders can now count wedding gift funds toward the down payment and closing cost requirement. The loan must be underwritten by Freddie Mac standards, one of the two main conventional loan agencies in the U.S. (the other being Fannie Mae which does not yet allow wedding gifts).

The best part is that the donor does not have to be related to the borrower. Anyone besides an interested party to the home purchase can give the gift.

Documentation rules are as follows:

• You must provide a copy of the marriage license or certificate

• You must provide your bank statement (not the donor's) showing the gift deposit and date

• Funds must be deposited to the applicant’s account within 90 days of the marriage license/certificate

Unlike standard gift funds, the borrower does not have to provide the donor’s bank account showing the withdrawal. Nor is a gift letter required.

Presumably, a family member who was going to give a gift anyway can save themselves some paperwork by contributing funds within 90 days of the wedding.

Graduation Gift as a Down Payment Source

Rules for graduation down payment gifts are similar to gifts for weddings.

• Provide evidence of graduation and date

• Supply the borrower's bank statement showing the deposit

• Funds deposited within 90 days of graduation can count toward the down payment

Donors do not have to be related and don’t have to supply a gift letter, their bank statement, or proof of funds transfer.

Individual Development Accounts (Matching Funds)

Some nonprofit agencies offer Individual Development Accounts, or IDAs. These are savings accounts in which the nonprofit matches funds. The future homebuyer contributes on a regular basis and eventually builds enough savings for a down payment.

These are acceptable funds as long as the agency or organization is not a party to the eventual home purchase, such as a credit union, lender, or real estate agent.

While IDAs can be used, they come with rules.

• The matching ratio must be no more than $3 for every $1 contributed

• The account must show a history of regular contributions

• Funds must be fully vested

• If matching funds are repayable for any reason, that must be documented and using the funds may come with additional requirements

If you plan to use matching funds, show documentation to your lender when you apply.

Employer Down Payment Assistance

Your employer can give you down payment funds through what is known as an EAH or Employer Assisted Homeownership benefit.

It’s not as easy as your boss writing a check, though.

The company must have an established, ongoing, and documented employee benefit program. Additionally, the employer may not have an interest in the eventual home purchase transaction.

With employer assistance, you must verify whether it becomes repayable upon termination should that happen after you purchase the home. For repayable EAH plans, the lender must include the potential payment in your debt-to-income ratio (DTI). Buyers with high DTIs should make sure they qualify with the EAH payment unless it’s a fully forgivable grant.

There is an exception, though. The lender may disregard the payment if it is only required upon a sale or refinance, or if payments begin five years after termination.

Plenty of Options to Cover Your Down Payment

Down payment is often cited as the biggest hurdle to homeownership, but it doesn’t have to be.

With many options available to today’s buyer, there’s usually a way to drum up necessary funds.