Can a relative take out a loan to give you a down payment gift to buy a home? A relative is willing to draw down on a HELOC to give me a gift for a down payment but I want to know if this causes any issues when I apply for a mortgage.

By Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated October 20, 2020

While it is possible for a relative to take out a loan to give you a down payment gift for a home, it can create some additional challenges when you apply for a mortgage.  That said, as long as you can provide the required documentation and the gift provider has the ability to afford the loan on their own, the gift should be an acceptable source of funds for your down payment.

The primary issue with this scenario is that any money you receive from another party for your down payment must be a gift and not a loan that you are required to repay. If lenders learn that the gift provider is drawing down a HELOC or taking out a home equity loan, this may create an issue even if the relative and not the applicant is responsible for the loan. In some cases the lender may classify the gift as a loan to the borrower which effectively negates the benefit of the gift.

Factors such as the applicant's and the gift provider's financial profiles are also taken into consideration.  If the gift provider has significant financial assets and income then the lender is more likely to allow the gift even if it comes from a loan.  In short, the lender wants to verify that the relative makes enough money or has sufficient personal funds to repay the loan they take out for the gift.

In this situation the gift provider should be comfortable disclosing certain financial information and documentation to the lender, which may not be the case.  The lender may request the gift provider's bank statements and other documents.

The gift provider may push back on the lender's request, reasoning that they are not applying for the mortgage. Although this perspective is sensible, the lender may not move forward unless the gift provider submits documents that demonstrate their financial wherewithal.

One way to avoid this potential issue is to have your relative take out the loan and give you the funds several months before you apply for a mortgage so that the funds appear on your bank statements for at least two months.  This is called seasoning the funds because the money is in your account for an extended period of time before you use it for your down payment.

The gift provider is also required to provide the lender a gift letter that states that the money provided is truly a gift and not a loan that needs to be repaid.  The letter should also outline the amount of the gift, when it was made, contact information for the gift provider and their relationship to the applicant.  Please note that if the gift is really a loan, and you state otherwise on your loan application, this is mortgage fraud.

Given your unique circumstances, we recommend that you contact multiple lenders to understand their down payment gift documentation requirements and how they would handle a gift that comes from a loan taken out by a relative.  Down payment guidelines vary so we advise you to speak with several lenders. 

If lenders do not permit you to use the proceeds from your relative's loan for a gift, you should consider a low down payment program.  The down payment required by these programs ranges from zero to 3.5% of the property purchase price, which significantly reduces the financial commitment required to buy a home.

Review Best Low Down Payment Mortgage Programs

These programs have different eligibility requirements, as well as positives and negatives, so you should review multiple programs to find the option that best meets your needs. You can also combine a low down payment mortgage with a down payment assistance program to buy a home with minimal personal financial contribution.  This is another creative way to qualify for a mortgage if you cannot use a down payment gift.

How a Down Payment Assistance Program Works 

Sources

"B3-4.3-04, Personal Gifts."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, September 29 2015.  Web.