What's the deal with gifts and grants and how do I get my hands on them?
Posted by Jenni
Sat 06 February 2021
There’s no such thing as a free lunch.
So there’s definitely no such a thing as a free house either, right?
Or is there?
Well, there actually is such a thing as free money for a house. And, we don’t mean the buying-a-fixer-upper sorta way. We’re talking fast-tracking to your down payment with cold hard cash — from gifts and grants.
Let’s start with the basics, shall we? What do we mean by gifts and grants?
What’s a gift?
Chunky, lovingly-knitted sweaters from grandma with your initials are definitely gifts. So are those impossible-to-get concert tix your BFF mysteriously conjured up.
But that’s not what we’re talking about.
We’re talking about a monetary gift that you can use towards your down payment — known as a “Significant Monetary Gift” in the mortgage world.
Significant Monetary Gifts.
For conventional loans, they define a “Significant Monetary
Gift” as a cash gift that’s greater or equal to ½ of your monthly qualifying income.
So, if you make $4,000 a month, a Significant Monetary Gift is at least $2,000.
For U.S. Department of Agriculture (USDA) and Federal Housing Administration (FHA) loans, that’s a different story. The USDA and FHA are federal government agencies that back the loans. They don’t give you money directly. They protect your lender against loss, in case you can’t pay it back.
They define it as any cash gift that’s at least 1 percent of either the appraised value or purchase price.
Just like that “trendy” velour track suit you couldn’t return fast enough, remember that guidelines aren’t one size fits all — they can vary by loan type. And here are some other important nuggets to keep lodged in that gray matter.
Who gets to play Santa?
Conventional loans only allow down payment gifts from your family - yeah the weirdos with matching outfits you see at reunions. That includes domestic partners, step and adopted relatives, in-laws, etc.
FHA loans allow gifts from your family, but also allow gifts from employers, charitable orgs, and labor unions.
And VA and USDA loans?
They let you get down payment gifts from pretty much anyone. The U.S. Department of Veterans Affairs (VA) and USDA are cool with anyone who’s not involved in the home transaction, which only excludes folks like buyer’s and seller’s agents, home sellers, developers, and builders.
What about taxes?
Luckily, you don’t have to pay the taxman on down payment gifts. However, your not-so-secret-Santa might.
Gifters may have to pay a gift tax if the amount given exceeds the annual exclusion limit. So, don’t be tempted to half ass an investigation of that year’s gifting tax rules — unless you want to risk permanent banishment from Aunt Jane’s Christmas card and homemade cookies list.
In short, before you dive into any kind of gifting situation, just make sure you understand what it means for everyone involved. Check out this webpage for more info:
It has to be in writing.
And you’ll need to have a “gift letter” for each donation.
This clearly states that it’s 100% not a loan. Make sure to check with your lender on specific instructions for the letters.
This is what we look for in a gift letter:
- Your name
- Gifter’s name
- Gifter’s address
- Address of the home you’re buying
- The gifter’s relationship to you (Who the hell are these people? Your mom? Step-grandpa? fourth cousin twice removed?)
- How much did they gift you?
- When did you or will you receive the gift?
- Where’s this cash coming from? An investment, checking, or savings account? A dirty old mattress it was sewn into for a “rainy day”?
- A statement saying the money is a gift, not a loan. Make it crystal clear.
Documents or it didn’t happen.
You’re definitely going to need to keep good records for down payment gifts. They should include documentation of the gift amount, and show that you received it (like a bank statement).
If someone’s selling investments, such as stock, for the gift, you should get a brokerage account statement showing the sale. Lenders may ask for rock-solid proof that the gifter has the funds in their possession, or that they’ve sent them to you.
Oh — and even if you’d never be caught dead in that chunky sweater — remember to call grandma and thank her for it. Because she may just give “one of her favorite grandkids” some dough to lighten that homebuying burden.
What’s a grant?
You may be able to score some grants — free cash that doesn’t need to be paid back — for a down payment or even closing costs.
If you’re eligible, you can apply for specific homebuyer grant programs. They’re offered by state housing agencies and private orgs.
Grants for home-buying virgins.
If you’re a first-time homebuyer, you’re in luck.
Because there’s loads of potential grants for newbies like you. Lots of states offer first-time homebuyer grants. But, surprise surprise. You don’t have to technically be a first-timer to qualify for some of these loans. You can still apply to some even if you’ve bought before — as long as it’s been at least three years since you’ve owned a place.
Here are some sites you can use to find these state-based grants:
What about at the federal level - Can I pick Uncle Sam’s pockets?
So, we know you might get state money. But how about federal money?
If you want to research all the grants offered by Uncle Sam, then go to Benefits.gov.
You’ll probably want a hearty snack and settle in, ‘cause there’s a shit ton of information there.
Otherwise, you can find information on HUD-supported individual assistance but they don’t give grants to individuals directly, only through state and local channels.
National Homebuyers Fund.
An assistance program that wipes out part (or all!) of your down payment or closing costs?
Say what now?
You heard — The National Homebuyers Fund (NHF) will cover those costs up to 5% of the total loan amount. AND it’s available in all 50 states.
Note: It sometimes takes the form of a second home loan with a 0% interest rate, which can be used for purchasing or refinancing your primary residence.
Here’s some of the nitty-gritty on the NHF DPA:
- You have to live in the home for at least 3 years.
- You have to use one of their participating lenders.
- The grant can be used with any loan type, including conventional, FHA, VA, and USDA.
The lowdown on grants.
Program guidelines can vary from state to state, but they usually look at similar factors. These include your credit score and income, and the home’s price and location.
Remember to also check in with your county, city, state, and any relevant professional associations about grant programs you may qualify for. For example, there may be some generous local down payment grants set aside for public servants, like firefighters or teachers. It’s the least we can do for those who fight fiery blazes in our homes.
The fine print.
Though grants are free money, don’t forget to read the documents and guidelines carefully. They may be ‘free’ but they suck up some of your time.
If not, you may end up unknowingly taking a grant that’s only free and clear if you live in the house for at least a few years — when you had your heart set on renting it out while building your Airbnb empire, or owning that floating tiki bar in Fiji, after just a couple. Also, you should always read the fine print - or pay someone to.
Don’t leave money on the table.
Candlesticks, antique silverware, fancy holiday napkins. These things look good on a table.
But you know what looks like shit on a table and makes you feel like it, too?
Finding out later about money you could have gotten. You hate to see it. So, re-read this article, spend time to poke around those sites, and try to see if you’re leaving any Benjamins or Grovers on that table (Fun fact: Grover Cleveland’s on the $1,000 bill — yeah, we just found out, too).