Buying a home is a major milestone many hope to achieve, but navigating the path to homeownership can feel daunting, especially in today’s dynamic real estate market. Down payments, closing costs, and outstanding debts can feel like significant obstacles to tackle on your own and make your goal feel even further away.

Fortunately, you don’t have to go the road alone! With the help of family, these challenges can become opportunities for collaboration and support. Whether through a monetary gift, co-signing on your mortgage, or lending you money directly, help from your family can boost your purchasing power and turn your dream of homeownership into a reality.

How can my family help me buy a home?

There are three ways family can help you with a home purchase:

Give You a Set Amount of Money

A gift of money can often be the most straightforward way your family can help. They can write a check for any amount they choose, and that’s it! There’s no need for a contract or ongoing commitments, and you can decide if it would best be used for your closing costs or towards your down payment to avoid private mortgage insurance (PMI).

Co-Sign or Co-Borrow on Your Loan

If you have a family member with good credit and financial stability, they can co-sign or co-borrower on your mortgage loan with you. This can help you qualify for a larger loan amount or secure better loan terms. They will need to meet all requirements from the lender and sign loan documents at closing, too.

Finance Your Mortgage

Instead of going through the bank, your family member might offer to lend you money directly. You would still have to repay the loan according to agreed-upon terms, but it could be structured as a formal loan with interest or as a more informal agreement.

Purcell 24 Floor Plan, Front Garage Collection, Chappelle Gardens Community, Edmonton, Alberta

What are the guidelines for using gift money towards my mortgage costs?

There are strict rules and limitations for using a cash gift in a home purchase, and they vary by mortgage type, lender, and tax authorities. Some of the standard guidelines include:

Gift Letter

Lenders typically require a gift letter signed by both the donor (the family member providing the gift funds) and the recipient (the homebuyer). The letter confirms that the funds are a gift and not a loan and usually includes details such as the gift amount, the relationship between the donor and the recipient, and a statement that no repayment is expected.

Source of Funds

Lenders like to see money gifts – easily traceable checks, bank transfers, or wire transfers – in a borrower’s bank account three or four months before applying for a mortgage. Lenders may also require documentation showing the source of the gift funds, such as bank statements from the donor demonstrating that the money has been in the giver’s account for a certain length of time.

Gift Amount Limits

Depending on the type of mortgage and the lender's policies, the amount of gift funds that can be used towards a home purchase may be limited. For example, with a conventional loan, the entire down payment can often be gifted, while an FHA loan may restrict the percentage of the down payment that can come from gift funds. It’s essential that you confirm gift fund policies with your specific lender.

Relationship to the Donor

Lenders typically require gift funds come from an immediate family member or another similar close relative. In some cases, funds from friends or other sources may be acceptable, but additional documentation and verification may be required.

Tax Implications

If you use gift funds for your home purchase, there may be certain tax implications, such as limitations and reporting requirements. In the United States, annual gift tax exclusion limits dictate how much an individual can gift to another person without triggering gift tax obligations. It’s essential to consult with a tax advisor or accountant to understand all the tax implications of giving or receiving gift funds for a home purchase.

Down Payment Requirements

Even if gift funds are being used towards your down payment, the lender may still require the borrower to contribute a certain percentage of the down payment from their own funds. This is known as the borrower’s “skin in the game” and helps mitigate the risk for the lender.

You should work closely with your lender and possibly a real estate attorney to ensure compliance with all requirements when using gift funds for your home purchase.

Lucca Floor Plan, Estate Collection, Livingston Community, Calgary, Alberta

What should I know about having my family member co-sign or co-borrow on my loan?

Co-signing or co-borrowing with a family member is a big decision with benefits and risks. Here’s what you should know:

Benefits of co-signing or co-borrowing

Improved Loan Terms

Having a family member co-sign or co-borrow with you can help you qualify for a larger loan or secure better loan terms, such as a lower interest rate or reduced fees. The better their credit history and financial stability, the better terms you’ll likely receive.

Increased Buying Power

By combining your income and assets, you can qualify for a larger loan amount, which, in turn, allows you to buy a more expensive property or afford a higher monthly payment.

Sooner Ability to Buy

For first-time homebuyers or those with a limited credit history, having a family member co-sign or co-borrow with you can help overcome the lack of established credit and help you achieve your goal of homeownership sooner.

Risks of co-signing or co-borrowing

Financial Responsibility

As a co-signer or co-borrower, your family member is equally responsible for repaying the loan. If you default on the loan or miss payments, it will negatively impact their credit score and financial standing.

Strained Relationships

Even if you are on excellent terms with your family member, money can change the dynamic between you. If there are disagreements or financial difficulties down the road, it can strain your relationship.

Legal Obligations

Co-signing or co-borrowing involves legally binding obligations. If the primary borrower defaults on the loan, the co-signer or co-borrower may be held responsible for repaying the debt, including any late fees or collection costs.

Impact on Future Borrowing Ability

How you decide to structure your loan now can impact the future. If a family member co-signs or co-borrows on your loan, it will appear on both your credit reports, potentially affecting your debt-to-income ratio and creditworthiness when applying for other loans or lines of credit, such as a new car loan.

Ponderosa Floor Plan, Highland Ridge Collection, Alamar Community, Avondale, Arizona

What should I know about having a family member finance my mortgage?

When a family member directly funds your mortgage, it involves them providing the money needed for your home purchase so you don’t have to go through a traditional lender. Here’s what you should know about this arrangement:

Flexible Terms

Direct financing from a family member can offer more flexible terms than traditional lenders, like no closing costs. You can also negotiate repayment terms, interest rates, and other aspects of the loan directly with your family, which may result in a more favorable arrangement.

Simplified Process

Bypassing a traditional lender can reduce the extensive paperwork, approval process, and stringent requirements typically associated with mortgage loans. You also have direct communication and negotiation with your family member, resulting in a smoother process overall.

Legal Documentation

Despite the informal nature of this arrangement, it’s imperative that you formalize any agreement with legal documentation, such as a promissory note or loan agreement. This document should outline the terms of the loan, including the loan amount, interest rate, repayment schedule, and any other relevant details.

Tax Implications

You’ll need to consider any tax implications on both sides of the transaction. Interest payments made on the loan may be deductible for you, while your family member may have to report the interest income on their tax return. Consult with a qualified tax advisor to understand the specific implications of your situation.

Exit Strategy

The only certainty in life is change. Have a plan in place for what will happen if circumstances change, such as one party needing to sell the property or refinance the loan. Discuss potential scenarios and agree on a course of action to address them. It may be beneficial to outline different courses of action in a contract so all possibilities are clearly defined and addressed.

Villa Portfolio, Central Park Community, Denver, Colorado

How can I minimize potential issues when using family funds for my home purchase?

Navigating family dynamics and monetary transactions can be tricky. Careful planning, clear communication, and defined expectations and obligations can help minimize potential misunderstandings.

Here are some strategies to help mitigate possible issues:

Open Communication

Start by having honest and transparent conversations with your family about the arrangement. Clearly outline your expectations, financial capabilities, and any concerns you may have.

The giver may want to consider disclosing their involvement to other immediate family members, such as their other children, grandchildren, etc., so there is transparency amongst the family. Disclosing their involvement in your home purchases allows them to set expectations on any assistance they’ll provide others in the future.

Formalize Your Agreement

Document the terms of the loan or gift in a formal agreement, such as a promissory note or loan agreement. This document should clearly outline the loan amount, interest rate (if applicable), repayment schedule, and any other relevant terms. Having a written agreement provides clarity and protection for all parties involved.

Seek Legal Advice

Consider consulting with a real estate attorney to ensure the agreement complies with relevant laws and regulations. A legal professional can help draft the necessary documents, review the contract terms, and provide guidance on any potential legal implications.

Maintain Documentation

Keep thorough records of all transactions and communications related to the loan or gift. This includes copies of the agreement, loan payments, and any correspondence with your family member. Having documentation on hand can help resolve disputes or clarify details if needed in the future.

Family assistance can be a powerful tool in achieving homeownership. Before proceeding with any of the above options, it’s important to thoroughly discuss any arrangement you make with your family and possibly consult with a financial advisor or real estate professional for expert guidance.

Let us help you find your new home! Explore where we build and connect with our sales team when you’re ready to learn more. We’ll be expecting you!