What Happens if I Pay Back a Gifted Down Payment?

For most homebuyers, getting a down payment together is the biggest hurdle to buying a home. Even if you can easily afford your monthly mortgage payments, coming up with the cash to cover the upfront costs of buying a home is a tall task. 

You’re not alone. This is a relatively common scenario. It’s why many homebuyers, especially first-time homebuyers, turn to down payment assistance in the form of gifts and grants. 

You may have already considered asking for help with your down payment, but you probably also have questions: Who can give money for a down payment? What happens if I pay back a gifted down payment? Are there different types of down payment gifts, or is cash the only option?

These are smart questions to ask, and we’ll answer them all. 

In this article, we go over what happens if you pay back a gifted down payment, the different types of down payment gifts, and what to include in a mortgage gift letter.

Disclaimer: This article is for informational purposes only and should not be considered as legal or financial advice. Please consult an attorney, mortgage lender, or CPA for guidance on your specific situation.

What happens if I pay back a gifted down payment after closing?

In short, you can’t pay back a gifted down payment. If a friend or family member expects you to repay the down payment gift, it’s actually a loan and must be reported as such. Failing to do so has serious legal and financial implications.

The legal implications of returning a gifted down payment

If you tell a lender that a loaned down payment is a gift, this is considered fraud. 

Without getting too technical, what you’ve done is taken out a loan without reporting all of your liabilities. This is why it’s important that anyone who offers to help you with a down payment understands the money is a gift, and they won’t be getting repaid.

Please consult a lawyer if you have concerns about the legal implications of a down payment gift.

Financial implications

A loan impacts your debt-to-income ratio; a gift down not. As we said before, if you plan to pay back money given to you for a down payment, this money is considered a loan and counts toward your debt-to-income ratio. 

The additional debt can limit how much you’re able to borrow to purchase a home, or it can even make you ineligible for a mortgage loan in the first place.

Who can gift money for a down payment?

If you don’t have the cash on hand for a down payment, there are a couple of options for external funding sources: gifts and down payment assistance programs. 

Family and friends

Family and friends can give a gift to fund your down payment. In fact, it’s fairly common for family and friends to help people with down payment costs. According to the National Association of Realtors, each year roughly 28% of homebuyers rely on gifts from friends and family to fund all or part of their down payment. 

In most cases, family members need to be able to prove they have a standing relationship with you, the buyer. Friends can also gift you money for a down payment, but not all loan programs allow gifts from friends. 

Always check with your lender before you accept any money for your down payment. Some loans, including home buyer programs, have mandatory minimum buyer requirements. Make sure to understand these requirements and how gifts factor in.

Down payment assistance programs

Government agencies, non-profits, and even certain mortgage lenders offer down payment assistance programs. Some of these programs come in the form of grants that don’t have to be paid back. In some cases, loan programs even accept down payment assistance funds from your employer or trade union.

The three types of down payment gifts

Down payment gifts don’t have to be a direct transfer of cash. There are several ways for family, friends, and organizations to help you get the money you need for a down payment.

Gift of equity

There are a few terms you’ll need to understand here. First, equity is the difference between the value of a house and how much the owner owes on that house, so long as that difference is positive.

For example, if a house is worth $300,000, and the owner owes $200,000 on the mortgage, the owner has $100,000 equity in the house.

If a family member or friend owns a home and they have equity in it, they can sell you the home for less than the market value and use the equity as a down payment gift. Here’s how this works:

Using our example from before, the house is worth $300,000 and the owner has $100,000 equity in the home. They could sell you that house for $250,000. Since the house is actually worth $300,000, that $50,000 difference between the value and what you pay for the home would be the gift of equity.

In short, a gift of equity is when someone sells you a home at a reduced price, rather than directly giving you any money. Typically, only family members can give gifts of equity. However, it is sometimes possible for a friend to give a gift of equity if you can prove a close relationship with them.

Gift of cash

Gifts of cash are straightforward transfers of money from the giver to you. The act of giving the money is simple. However, there are tax implications for the giver of the money.

A family member or friend can give you up to $16,000 without having to pay gift tax (or $32,000 if they’re a couple who files taxes jointly). Taxes must be paid on any gift over these thresholds.

Again, this only applies to the giver of the money. You don’t have to pay gift taxes as the recipient. If anyone wants to give you a down payment gift, they should check with a CPA first.

Homebuyer grant

Most homebuyers, especially first-time homebuyers, don’t realize just how many down payment assistance grants are available. Government and non-government organizations offer homebuyer grants designed to help all sorts of homebuyers.

Sadly, these programs are usually very poorly publicized, which is why you likely haven’t heard of them. Even worse, there are also very few places where you can compare all of these homebuyer grants side-by-side.

Fortunately, Stairs is a great option for homebuyers looking to make sense of their options. Stairs curates all of these down payment assistance programs into a complete online database, where you can find and compare your options for down payment assistance. 

This includes gifted options like grants, as well as other options like tax breaks and special purpose credit programs. You can get all the information you need from one trusted source, without spending hours searching the internet and piecing things together.

What happens if I get a down payment gift but pay it back soon afterward?

If you get a down payment gift, it must be a gift and will not be repaid. Otherwise it must be reported to the lender as an active loan, even if you plan on repaying that loan very quickly. To avoid misunderstandings about this, it’s best to put things in writing when you get a down payment gift.

What documentation do I need when I get a gifted down payment?

When you receive a gifted down payment, you need to document this with a gift letter. A gift letter confirms your relationship with the giver and the amount of the gift. The letter must also clearly state that the money is a gift, with no obligation or expectation of repayment.

Some lenders may require additional documentation, such as evidence that the gift giver has the funds available to give. Before the mortgage loan is issued, you may also be asked to provide a bank slip that shows the funds have been transferred to your account. 

In most cases, the documentation for a gifted down payment is relatively easy to get, you just need to be aware of what documentation you need and when you need it.

What to include in your mortgage gift letter

Your mortgage gift letter will need a few specific details to support the claim that the money is a gift, not a loan, and that the giver actually has the money to give. This is what your mortgage gift letter should specify:

• Who is giving the gift and what relationship they have with you (i.e. mother, father, longtime friend, etc.).
• The exact amount of the down payment gift.
• A statement that the money is a gift with no obligation or expectation of repayment.
• Signatures from the giver and the recipient.

Be sure to check with your lender and make sure they don’t require any additional details on the mortgage gift letter. They have the final word on this.

If you are receiving a grant for your down payment, consult with the grant program and your lender to find out what documentation you need. Working with a lender that is familiar with your particular down payment assistance program is incredibly helpful in this case.

A lender that understands your grant program can help you get the documentation you need. They’ll also know what documents the assistance program supplies and how those documents satisfy the requirements of the loan.

To streamline the process, if you find your down payment assistance program through Stairs, you’ll also be connected to lenders who are familiar with your specific grant. 

Beyond down payment gifts: Other assistance options for first-time home buyers

If a gifted down payment from family and friends isn’t an option for you, it’s not game over just yet.  As we already mentioned, there are excellent down payment grant programs available for qualifying home buyers, especially first-time home buyers. 

There are also a number of other programs to help you cover home buying costs. Below, we’ve listed some of the most common types of programs.

Down payment loans and deferred payment loans

Some lenders offer specialized loans intended to help home buyers minimize the upfront costs of homeownership. These usually come in the form of a second loan, separate to your mortgage loan, that covers part or all of your down payment. 

You’ll often hear these referred to as a second mortgage loan or a down payment loan. Deferred payment loans and forgivable loans also fall into this category.

Tax credits

There are also tax credit programs designed to help people break into the housing market. A property tax bill credit reduces the amount of taxes you owe on your property taxes at the time of closing. 

While it’s not exactly down payment assistance, a property tax bill credit reduces the other upfront costs associated with homeownership.

Special purpose credit programs

Special purpose credit programs make it easier for homebuyers, especially those from underserved communities, to qualify for a home loan. Most special purpose credit programs apply loan qualification standards which are tailored for those who need assistance covering purchase costs. 

Get the help you need to make your most important purchase

There are plenty of options for down payment assistance, but it can be difficult to sort through all of the information out there. Stairs Financial does this heavy lifting for you, helping you put your first home within reach. 

Stairs connects you to qualified lenders who work with all the down payment assistance programs you might qualify for, then lets you compare your options side-by-side.

With Stairs, you can easily find out exactly which down payment assistance programs are available to you, so you can make a more informed decision.

Learn more.