Down Payment and Closing Cost Questions, Answered

Can I use gift money for a down payment, and what does the paperwork look like?

Yes, you can usually use gift money for a down payment, but the lender has to document it. Expect a signed gift letter and proof the money moved from the giver to you or the closing agent.

On conventional loans, the giver is usually a relative or someone with a family-like relationship, and usually cannot be tied to the builder, agent, or another party to the sale. The letter states the amount, says no repayment is expected, and lists the giver's name, address, phone number, and relationship to you. Some second homes and multi-unit homes also require some of your own money, and gifts are not allowed on investment properties. FHA requires the letter to be signed and dated by both of you. Other programs have their own rules.

Sources: B3-4.3-04, Personal Gifts, Fannie Mae Selling Guide; Does HUD allow gifts of equity? FHA FAQs, HUD; Create a loan application packet, CFPB

Can I use my 401(k) for a down payment, and how does the timing work?

Often yes, because vested 401(k) money can be an acceptable source of funds on a conventional loan. Timing depends on your plan, since you may need to withdraw or borrow the money before closing.

The lender confirms you own the account, that it is vested, and that withdrawals are allowed whether or not you still work there. Depending on the account value, the lender may need proof you received the money. A plan loan can also work on conventional loans, with the loan terms and transfer documented. Plans do not have to offer loans or hardship withdrawals. Hardship money is generally taxable, may face an additional early distribution tax, and cannot be paid back to the plan. The IRS first-time homebuyer exception to that tax is for IRAs, not 401(k) plans. Other loan programs have their own rules. Ask your plan how long it takes, and check with a tax professional first.

Sources: B3-4.3-03, Retirement Accounts, Fannie Mae Selling Guide; B3-4.3-01, Stocks, Stock Options, Bonds, and Mutual Funds, Fannie Mae Selling Guide; B3-4.3-15, Borrowed Funds Secured by an Asset, Fannie Mae Selling Guide; Retirement topics: Hardship distributions, IRS; Retirement plans FAQs regarding loans, IRS; Exceptions to tax on early distributions table, IRS

Why did my closing costs change from my Loan Estimate?

Your closing costs can change because a Loan Estimate is an estimate and some charges are allowed to move. Federal rules limit how much depending on the type of charge.

A change in circumstances, such as a different loan program or down payment, an appraisal higher or lower than expected, or income that cannot be documented, can bring a revised estimate. Your Closing Disclosure should arrive at least three business days before closing. Only a few changes restart that wait, such as a different loan product or an added prepayment penalty. Charges above the limits without a valid change must be refunded within 60 days after closing.

• No increase: lender or broker fees for required services, required services you could not shop for, and transfer taxes.
• Combined limit: recording fees and required services from a provider on the lender's list.
• Any amount: prepaid interest, insurance premiums, escrow deposits, and services you picked from outside the lender's list.

Sources: Can my final mortgage costs increase from what was on my Loan Estimate? CFPB; 12 CFR 1026.19, Regulation Z, CFPB; Your home loan toolkit, CFPB

What is the difference between a Loan Estimate and a Closing Disclosure?

A Loan Estimate shows the terms and costs a lender expects to offer if you move forward. A Closing Disclosure shows your final loan terms and costs before you sign.

The lender must give you the Loan Estimate within three business days of receiving your application, and at that point it has not approved or denied the loan. You should receive the Closing Disclosure at least three business days before closing. Use those days to compare the two forms line by line, including the loan terms, closing costs, and cash to close. If a number differs from what you expected, ask your lender to explain why before you sign.

Sources: What is a Loan Estimate? CFPB; What is a Closing Disclosure? CFPB; What can I expect in the mortgage closing process? CFPB; Your home loan toolkit, CFPB

Why do lenders ask about large deposits in my bank account?

Lenders ask about large deposits because they need to know the money is yours and not an undisclosed loan. If you plan to use that money to buy the home, it usually has to come from an acceptable, documented source.

Program rules define what counts as large, usually by comparing the deposit to your income. On a conventional purchase, a written explanation, proof you sold an asset, or a gift document can help. If the bank statement already shows the source, such as payroll or a tax refund, more explanation is usually not needed. If a deposit cannot be sourced, the lender can subtract it from your verified funds. Refinances usually do not need large deposit explanations under Fannie Mae rules, though borrowed funds still count. FHA has its own large deposit rules.

Sources: B3-4.2-02, Depository Accounts, Fannie Mae Selling Guide; Single Family Housing Policy Handbook 4000.1 update transmittal, HUD; Loan Estimate explainer, CFPB

Can the seller help pay my closing costs?

Often yes, a seller can help pay your closing costs if your purchase contract says so. The limits depend on the loan program, the type of home use, and sometimes how much you put down.

On conventional loans, seller help can cover closing costs and prepaid items, but it cannot fund your down payment or required reserves, and it cannot exceed your actual closing costs. FHA also limits seller contributions and does not let them count toward your minimum required investment. VA does not limit credits for loan closing costs, though it does limit seller concessions, which are separate items of value. Anything over the limit can reduce the price used to size your loan. Check the current limits with your lender before you write the offer.

Sources: B3-4.1-02, Interested Party Contributions, Fannie Mae Selling Guide; What costs can a seller or other interested party pay on behalf of the Borrower? FHA FAQs, HUD; VA funding fee and loan closing costs, VA; What can I expect in the mortgage closing process? CFPB

What is cash to close, and when do I find out the number?

Cash to close is the amount you must bring to closing after credits and money you have already paid. You see an estimate on your Loan Estimate and the final figure on your Closing Disclosure, which you should get at least three business days before closing.

It generally includes your down payment and closing costs, minus deposits already paid, seller credits, and other adjustments. It is different from total closing costs, which leave out your down payment. If corrections are needed, a corrected Closing Disclosure can still reach you at or before closing, so confirm the figure with your closing agent. You usually pay by cashier's check or wire, and the lender needs documents showing where the funds came from.

Sources: Loan Estimate explainer, CFPB; Closing Disclosure explainer, CFPB; What can I expect in the mortgage closing process? CFPB; 12 CFR 1026.19, Regulation Z, CFPB