How Down Payment Gift Assistance Programs Work
Down payment gift assistance programs help homebuyers cover down payment and closing costs. Potential homebuyers who can make a house payment with no difficulty sometimes can't buy a house because they don't have the funds required for a down payment and closing costs.
Prospective buyers who don't have the funds to close on a home might consider using a down payment gift assistance program, sometimes called a down payment grant program. Typical assistance seems to range from 1% to 5%, and there are no minimum or maximum income requirements for buyers, but there may be top limits set on the sales price of homes.
Down Payment Gift Assistance Explained
Home sellers can help buyers pay closing costs by giving a portion of their proceeds back to the buyer at closing. The amount of seller assistance allowed depends on the buyer's loan. Sellers are prohibited from giving homebuyers down payment funds, but gift assistance programs provide a workaround.
The sellers enroll their house in a suitable program and contribute an amount equal to the assistance their buyer will receive at closing plus a fee—typically 0.75% of the home's sales price. When the transaction closes, the down payment funds are wired from the gift assistance program to the closing agent. The seller has no part in the transfer of funds.
Home sellers usually price their homes to include some room for negotiation. What matters to sellers is how much money they take away from the closing table. A buyer who has the funds to close may get a better deal on the house, while a buyer who needs help will pay closer to (or more than) the asking price, but in return, can negotiate help from the seller. This is referred to as a seller assist program. Sellers cannot use the gift as a charitable contribution, but consult with a tax professional as it may be deductible as a selling expense.
Usually, the lender will allow a seller to assist with up to 3% of the sales price, but in a handful of loans, that seller assist can be 6%. This means that if you are buying a home worth $300,000, a seller assist of 3% could credit you with $9,000 to pay closing costs—which are paid as a separate cost of the transaction and are not part of the purchase price.
Home Appraisal Value
One thing you must keep in mind is the home's appraisal value. The lender will not allow gift funds that result in a loan that exceeds the appraised value of the home. If you're working with a real estate agent, they can help you determine if the home is realistically priced and will appraise where it should. Your lender can help you choose a down payment assistance program and explain how your offer to purchase should be worded to ensure compliance with its underwriting guidelines.