The Best of Both Worlds – Using a Gift with Conventional Financing

If you were to ask a random sampling of mortgage lenders if you could buy a home using conventional financing and a down payment that was a gift from a family member, they’d probably all tell you “No”. 

Guess what?  THEY’RE WRONG.

When structured right, a qualified home buyer can purchase a home with the more advantageous conventional financing terms and gifted down payment money.

Why Would You Want Conventional Financing?

FHA financing is typically the route lenders use when a buyer is using gift funds for a down payment.  Conventional financing is often a better financial option, though, for the following reasons:

• Lower fees – FHA has a 1.75% upfront mortgage insurance premium that is typically added into the loan balance. This is a fee that you don’t have to pay with conventional financing.
• Lower monthly Mortgage Insurance (MI) – mortgage insurance is currently at 1.25% annually for FHA loans.  Conventional loan MI rates vary depending on credit score, down payment, etc.  The conventional MI is very likely going to be less than the FHA MI, often significantly less.
• Lighter home standards – FHA has tighter requirements on the condition of the home.  In our area, interior or exterior peeling paint often becomes a problem with FHA financing.  Conventional financing doesn’t have the same requirements, so some homes will be eligible with conventional financing that couldn’t be purchased with FHA financing.
• Faster removal of Mortgage Insurance – FHA requires MI to stay on a loan for a minimum of 5 years.  Conventional financing can normally remove it faster (typically 2 year minimum).

Interest rates between conventional loans and FHA loans vary, so sometimes FHA is still a good option just because the interest rate is better.  Given the lower closing costs, mortgage insurance and property requirements, though, conventional financing is often a better option.

So….Why would the other Mortgage Lenders Say “No”?

That’s a great question.  They would likely say no because they just can’t do this.  Many lenders are locked in with one MI company and the MI company is the one that says you can’t have the down payment gifted.  Ruoff Home Mortgage shops your MI to several different companies, though, to get you the best rate and the best terms.  One of the many MI companies out there will allow gifted down payments.  If you need this option, that’s the company we’d use.  Our competitors either won’t, can’t, or don’t even realize this option exists.  In any of those cases, they’re not the lender for you.  Ruoff Home Mortgage is.