By J.R. Conway, NMLS #147631 | CM Mortgage Services Inc.

Can Your Parents Help You Buy a Home in Chester County PA? Gift Funds for Conventional Mortgages Explained

I have this conversation with first time buyers and their parents all the time.

The buyer has good credit. Their income supports the mortgage. They have been saving money.

They are just a little short on the cash they need to purchase the home.

Then Mom or Dad asks the question.

“Can we help them with the down payment?”

In many cases, yes.

Family gift funds are very common in our area, especially with first time buyers. They can help with the down payment, closing costs, or simply allow the buyer to keep more of their own savings in the bank after settlement.

The important part is documenting the money correctly.

I am J.R. Conway, owner and vice president of CM Mortgage Services Inc., a second generation, family owned mortgage brokerage located in West Chester, Pennsylvania. I have been helping homebuyers and homeowners navigate mortgage financing for more than 20 years, with a particular focus on Chester County and the surrounding communities. I personally guide my clients from the first conversation through settlement, helping them understand their financing options, monthly payment, cash needed to close, and the local factors that can affect a home purchase. NMLS #147631.

When a family member wants to help with a home purchase, my advice is simple.

Call me before anybody starts moving money.

Receiving the gift is usually easy.

Explaining a poorly documented $20,000 deposit to an underwriter two weeks before settlement is not.

What Are Mortgage Gift Funds?

Gift funds are money provided to the buyer without an expectation of repayment.

That last part is important.

If your parents give you $20,000 but expect you to quietly pay them back over the next few years, that is not really a gift.

That is a loan.

A true mortgage gift does not have to be repaid.

Current Fannie Mae guidelines allow eligible gift funds on a principal residence or second home and permit those funds to be used toward the down payment, closing costs, or financial reserves. Gifts are not permitted on investment properties under these rules.

For most of the buyers I am talking about here, we are discussing a conventional mortgage on a primary residence.

Can My Parents Give Me My Entire Down Payment?

For many conventional buyers purchasing a one unit primary residence, yes.

This is something a lot of buyers do not realize.

Under current Fannie Mae guidelines, if you are purchasing a one unit primary residence, there is generally no minimum contribution required from your own funds simply because you are using gift money. All of the funds needed to complete the transaction may potentially come from an eligible gift, subject to the rest of the loan requirements.

Let us use a simple example.

You are buying a home for $400,000 with 3 percent down.

Your down payment is:

$12,000

If your parents are eligible donors and the mortgage otherwise meets the guidelines, they may be able to provide the entire $12,000 down payment as a gift.

That does not mean I want every buyer to walk into a home with no savings of their own.

But the guideline gives us flexibility.

Gift Funds Can Also Help With Closing Costs

The down payment is only one part of the money needed to purchase a home.

Buyers also need to think about:

Closing costs

Prepaid taxes

Homeowners insurance

Escrow deposits

Moving expenses

Money left after settlement

Eligible gift funds may also be used toward closing costs and certain reserve requirements under conventional guidelines.

That can be very helpful in Chester County because the total cash needed is often considerably more than the down payment alone.

I explain that complete picture in my Closing Costs in Chester County PA article and my Down Payment Chester County PA guide.

Sometimes the smartest use of a family gift is not simply getting the buyer to the minimum down payment.

It may be helping the buyer preserve some of their own savings.

A $450,000 Chester County Example

Suppose a buyer is purchasing a home for $450,000.

They are using a conventional loan with 3 percent down.

The down payment is:

$13,500

The buyer has saved $30,000.

They could use $13,500 of their own money for the down payment and then use the remainder toward closing costs.

But now suppose their parents want to give them $15,000.

That gift could potentially help with the down payment or eligible closing costs while allowing the buyer to keep more of their own money available after settlement.

I like that.

Buying the house is only the beginning.

You still have moving expenses.

Maybe you need furniture.

Maybe the water heater decides to stop working three weeks after you move in.

I would rather see a first time buyer keep a reasonable financial cushion than empty every account simply to say they did not accept help from family.

Who Can Give You Gift Funds?

Parents are the most common donors I see, but they are not the only eligible family members.

Fannie Mae permits gifts from relatives related by blood, marriage, adoption, or legal guardianship, along with certain other defined familial relationships. The donor generally cannot be the builder, developer, real estate agent, or another interested party to the transaction.

If you are unsure whether someone qualifies as an eligible donor, ask me first.

Do not move the money and figure it out later.

The Gift Letter Matters

The gift needs to be documented.

Fannie Mae requires a gift letter signed by the donor stating the amount of the gift, the donor’s contact information and relationship to the borrower, and that no repayment is expected.

In my process, I use the lender’s gift letter and have the required parties complete and sign it so the file is clear from the beginning.

The most important sentence on that letter is simple:

There is no expectation of repayment.

If the money has to be paid back, tell me.

We need to know that before the mortgage is submitted.

We Also Have to Source the Money

This is the part I want buyers and parents to understand.

The gift letter by itself is not enough.

We also have to establish where the money came from and show that it was actually transferred.

Fannie Mae requires the lender to verify that the donor had enough money available for the gift or that the funds were transferred to the borrower or closing agent. Acceptable documentation can include a donor check and evidence of the borrower’s deposit, or proof of an electronic transfer from the donor to the borrower or closing agent.

Here is how I think about it in a real file.

If your parents give you a check

I want to see the check.

I want to see evidence that the check went into your account.

Depending on the lender and file, we may also need documentation showing the funds came from the donor’s account.

If your parents wire the money

I want the wire transfer information.

I want to be able to follow the money from the donor to your account or to the settlement agent.

If the money goes directly to settlement

That can work too.

The lender still needs acceptable documentation showing that the closing agent received the gift funds from the donor. Fannie Mae specifically permits properly documented electronic transfers, certified checks, cashier’s checks, or other official checks provided directly to the closing agent.

The goal is simple.

I want a clean paper trail from Mom and Dad to you or to settlement.

Do Not Give Me a $20,000 Cash Deposit

This is one of the easiest ways to make a simple gift more difficult.

Dad takes $20,000 out of his account.

He gives you cash.

You deposit $20,000 cash into your checking account.

Now I have a large deposit sitting on your bank statement without the clean transfer history I want.

Do not do that.

There is usually no reason to.

A check or electronic transfer gives us documentation that is much easier to follow.

If your parents want to help, call me before the transfer.

I will tell you how I want it handled for your particular loan.

Should My Parents Transfer the Gift During Preapproval?

Not necessarily.

You can absolutely tell me that your parents plan to provide a gift before they actually send the money.

That is often the best way to handle it.

During your Mortgage Preapproval in Chester County, I want to know:

How much money you currently have

How much you expect to save

How much your family plans to contribute

How much you want to keep after closing

That allows me to build the entire purchase plan before you start making offers.

Then, when it is time to transfer the gift, we document it correctly.

Does Using Gift Money Make My Offer Weaker?

No.

A properly documented gift does not suddenly turn your conventional mortgage into a weak offer.

The seller is concerned with whether you are qualified and whether you have enough verified funds to complete the transaction.

If a family gift helps a qualified buyer preserve cash while maintaining a strong conventional financing structure, that can be a perfectly reasonable way to purchase a home.

The important part is making sure the gift is included in the mortgage approval from the beginning.

What About HomeReady and Home Possible?

Gift funds can also work very well with low down payment conventional programs such as Fannie Mae HomeReady and Freddie Mac Home Possible when the buyer meets the applicable eligibility requirements.

These programs can be particularly useful for first time buyers who have good income and credit but may not have accumulated a large amount of savings yet.

I have dedicated pages on both HomeReady and Home Possible if those programs are part of your buying strategy.

Frequently Asked Questions About Mortgage Gift Funds

Can my parents give me my entire conventional down payment?

For many buyers purchasing a one unit primary residence, yes. Current Fannie Mae guidelines do not require a minimum contribution from the borrower’s own funds solely because gift funds are being used.

Can gift funds pay my closing costs?

Yes. Eligible gift funds may be used toward down payment, closing costs, and financial reserves, subject to the applicable mortgage requirements.

Does a gift have to be repaid?

No. A legitimate mortgage gift must have no expectation of repayment. If repayment is required, tell your loan officer because the money needs to be treated differently.

Do my parents have to be on the mortgage?

No. A parent does not have to become a borrower simply because they are providing eligible gift funds.

Does the lender need proof of where the gift came from?

Yes. The lender needs to verify the donor’s ability to provide the funds or document the actual transfer.

What documentation do I need for a gift?

At a minimum, expect a properly completed gift letter and documentation showing the source or transfer of the funds. If a check is used, we may need the check and proof of deposit. If the funds are wired, we need the electronic transfer documentation.

Can the gift go directly to the title company?

Yes. Gift funds can potentially be sent directly to the closing agent when the transfer is properly documented.

Should my parents send the money before I talk to my loan officer?

I would not. Tell me about the gift first. Then I can explain exactly how I want the transfer documented for your loan.

Talk to Me Before Anyone Moves the Money

Family help is common.

There is nothing unusual about parents helping a son or daughter buy their first home.

The mortgage guidelines give us a lot of flexibility.

The part that matters is documentation.

If your parents want to help, tell me:

Who is giving the money

How much they plan to give

Where the money is currently located

Whether the funds will go to you or directly to settlement

Then I can tell you exactly what documentation we need.

That keeps the file clean and prevents a good thing from becoming an unnecessary underwriting problem.

For a broader explanation of the entire buying process, my Chester County Home Buyer’s Guide walks through preapproval, credit, savings, financing, offers, appraisals, closing costs, and settlement.

J.R. Conway is the owner and vice president of CM Mortgage Services Inc., a second generation, family owned mortgage brokerage serving homebuyers and homeowners throughout Chester County and the surrounding communities. With more than 20 years of mortgage experience, J.R. personally guides his clients from the initial conversation through settlement. NMLS #147631.

To discuss gift funds or your homebuying plan, start your secure mortgage application or call CM Mortgage Services Inc. at 610 430 6852.

CM Mortgage Services Inc. | Company NMLS #143821

All loans subject to approval. Equal Housing Lender.