down payment options

Down payment options, Pt.1: Gifts

The down payment should be your first order of business, after you determine what price range to look in. Then you can figure how much money you’ll need to come up with in order to get a mortgage.

Let’s break it down.

Determining the down payment

The rule of thumb is to buy a home that’s no more than three times the amount of your annual salary. So if you make $50,000 a year, you should purchase a home for around $150,000.

For a purchase price of $150,000, you’d need:

  • $4,500 for a 3% down payment (this is the minimum amount many lenders may allow)
  • $15,000 for a 10% down payment
  • $30,000 for a 20% down payment

That’s a lot of savings to part ways with, no matter which option you go with. And you probably don’t want to be flat broke as soon as you sign your closing documents. (Because how else will you buy that pergola you’ve had your eye on for your new patio?)

If you have family or friends who are willing and able to help support you financially, you could hang on to more of your own savings and use gift funds as part or all of the down payment.

For example, here’s a typical scenario: You just graduated from college and landed a pretty good job. You want to focus on saving up for a house, so you (gulp) decide to move back in with your parents.

Maybe your parents aren’t so thrilled about that prospect, though. I mean, of course they love you, but they just got you OUT of their house — and they’re kind of enjoying all the peace and quiet.

Luckily, there’s an option that could work for everyone involved. Your parents, being the kind and generous people that they are, could gift you cash that you could use for a down payment and closing costs so you can buy a home sooner. In fact, they can even gift you the entire amount of the down payment, and many lenders will allow it, depending on your credit score and the lender’s loan underwriting guidelines. (Keep in mind, some lenders require documentation of gift money, such as a signed letter from the donor and verification of transfer of funds. Check out Zillow’s post for more detailed info on this.)

Not a bad idea, right?

You get to buy a home, keep more cash in the bank and start building up your equity. And your parents? They get to keep their empty-nester freedom, and not worry about you using up all their hot water while you shower or eating that last piece of leftover pizza in the fridge that your dad had been looking forward to ALL day.