The down payment is usually the largest out-of-pocket expense for California home buyers, and it’s generally one that has to be paid up front.
But there are ways to reduce your out-of-pocket expense when buying a house in California, and down payment gifts are one of them. This article explains what down payment gifts are, and how you can use them when purchasing a home.
California Down-Payment Gifts Explained
A down payment “gift” is money given from a third party to a home buyer, intended to be used for down payment and closing cost expenses. There are many different types of mortgage programs that allow for down payment gifts in California, and that includes both FHA and conventional home loans.
Some California home buyers are unaware of down payment gifts, and as a result they often think buying a home is beyond their financial reach. “I can afford the monthly payments … I just can’t come up with the down payment.” This is a common complaint among otherwise well-qualified home buyers. We are publishing this article to increase awareness regarding down payment gifts in California, and the benefits to using them.
Requirement: A Letter from the Donor
If you plan to use a down payment gift to buy a home in California, you’ll probably have to obtain a letter from the person who is providing the funds. This is true for both FHA and conventional mortgage loans. Most loan programs that allow down payment gifts require such a letter.
The purpose of this letter is to clarify that the donor does not expect any form of repayment. In other words, the letter states that the down payment gift money is truly being gifted — and that it’s not a short-term loan.
Fortunately, writing such a letter is a simple matter. It just has to include the donor’s name, their relationship to the borrower, the amount being provided, and the fact that they do not expect any form of repayment. This last item is the most important component of a California down-payment gift letter.
Overcoming Obstacles to Homeownership
There are a lot of responsible, hardworking people in California who are good candidates for a home mortgage loan, but with one exception. They don’t have the funds for a large down payment.
There are many options and mortgage programs that can help home buyers overcome this obstacle. We just talked about one of them. Down payment gifts give California home buyers a way to purchase a house with little to no money out of their own pocket.
Additionally, certain mortgage loans allow for lower down payments than others. The Federal Housing Administration (FHA) loan program is a good example. With an FHA-insured mortgage, California home buyers can put as little as 3.5% down. Some conventional loans offer down payments as low as 3%. And then there’s the VA program for military members and veterans, which offers 100% financing.
The point is, there are ways to overcome the perceived hurdle of a down payment. By using a mortgage loan program that allows for a lower down payment (and/or by using gift money provided by a third party), California home buyers can greatly reduce their upfront, out-of-pocket expense.