Using Gift Money for a Down Payment on a Home
Saving up tens of thousands of dollars for a down payment can be a daunting challenge, especially if you’re a first-time homebuyer. That’s why a significant monetary gift from a generous family member can be a game changer when you’re working out the finances of buying a home.
However, when using gifts for a down payment, you should be aware of some mortgage gift rules for you and the donor. These requirements vary slightly depending on the type of loan. So let’s explore the ins and outs of using gift funds for a home purchase in greater depth.
Using gift funds for a down payment is ok if you follow mortgage gift rules
The opportunity to use gift money can bring the dream of owning a home much closer to reality. But know that it may also raise some suspicions with your lender that could jeopardize your mortgage application unless you follow specific payment gift rules.
Why? The lender wants to know that you have the ability to pay back the loan. So they may grow suspicious if a large and unexplained influx of cash appears in your bank account (and they will scrutinize your most recent bank statements as part of your mortgage loan application). Their concern is that you might have taken out a personal loan that may hinder your ability to make your mortgage payments.
It’s worth mentioning here that you cannot repay gift money used for a down payment. A gift repaid ceases to be a gift and becomes a loan. It is crucial that both the donor and recipient understand a down payment gift is not a loan.
The suspicion may even be enough for the lender to reject your mortgage application, sending you back to square one on your home financing.
How does gift money for a down payment work?
To avoid such an unfortunate speed bump in your homebuying journey, ensure your gift follows all the requirements for your loan and is properly documented.
Fannie Mae, which sets rules for conventional mortgage loans, updated and expanded its guidelines in 2022 regarding using gift funds. These guidelines cover the donor’s relationship with the borrower and what kind of property purchases allow the use of gift money for a down payment. It also outlines acceptable documentation to verify the gift.
Acceptable mortgage gift donors
Fannie Mae’s list of acceptable gift money donors now includes non-relatives who share a familial relationship with a borrower (think of a close family friend, for instance). The complete list is as follows:
• Spouse
• Child
• Other dependent
• Any relative related by blood, marriage, adoption, or legal guardianship
• Domestic partner
• Relative of a domestic partner
• Individual engaged to be married to the borrower
• Former relative
• Godparent
The donor may not be affiliated with any interested party in the transaction, including a builder, developer, or real estate agent.
Minimum borrower contributions based on home type
Believe it or not, you may be able to use the gift money for the entire down payment depending on the type of home you’re purchasing. However, in some cases, you’ll need to contribute a portion of your own money.
“In some scenarios for a conventional loan, the borrower has to have some ‘skin in the game,’” says Joe Flynt, SVP Credit Risk, AmeriSave Mortgage. “In other words, they need to use some of their own assets in addition to the gift money.”
The current Fannie Mae guidelines are as follows:
• No buyer contribution is required if the down payment is 20% or more and the home is a one-to-four-unit principal residence or a second home.
• No buyer contribution is required if the down payment is less than 20% and the home is a one-unit principal residence.
• A 5% minimum buyer contribution is required if the down payment is less than 20% and the home is a two-to-four-unit principal residence or a second home.
Example: You’re buying a $300,000 house to use as a vacation home with a conventional loan. You plan to make a 10% down payment ($30,000). At least 5% ($15,000) must come from your own funds. The remainder can be a gift.
• Gift money cannot be used for the down payment on an investment property.
How to document mortgage gift money
You’ll need documentation for the gift ready to go when applying for your mortgage loan.
According to Fannie Mae guidelines, the following are acceptable:
• A copy of the donor’s check and the borrower’s deposit slip
• A copy of the donor’s withdrawal slip and the borrower’s deposit slip
• Record of the electronic transfer of funds from the donor’s account to the borrower’s account or the closing agent
• A copy of the donor’s check to the closing agent
• A settlement statement showing receipt of the donor’s check
Additionally, you’ll need to document the gift with a mortgage gift letter, which the donor prepares. Your lender may provide you with a gift letter template to make the process easier.
“AmeriSave offers borrowers a standardized gift letter template,” says Flynt. “A gift letter describes who the person is, their relationship with the borrower, and how they will give the gift — check, cash, or transfer. It’ll be signed by the donor and the borrower. Then we’ll typically get a copy of the donor’s bank statement showing that they have the funds to donate the gift and how they will transfer the funds.”
The gift giver should expect to include the following information in the down payment gift letter:
• Their name, home address, phone number, and email address
• How they’re related to you
• The address of the home you’re purchasing
• The exact dollar amount of the gift
• The name of their bank and their account number
• The date the money was given to you (if by check) or transferred electronically to your account
• A statement that confirms this is a gift and does not need to be repaid
• Their printed name and signature
Down payment gift money by loan types
The Fannie Mae guidelines apply to conforming mortgage loans — those not backed by a government entity such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or United States Department of Agriculture (USDA).
Government programs have slightly different rules than conforming loan programs.
FHA loans
According to current rules, FHA allows gifts from the same broad list of donors as Fannie Mae, except for cousins, nieces, and nephews. FHA also allows gift money from your employer, labor union, a charitable organization that provides financial assistance, or any government program that assists first-time homebuyers.
“FHA has a minimum down payment of three and a half percent,” adds Flynt. “That can all come from the gift, as long as the gift is pulled from an eligible source of assets. The donor can’t use a personal loan or a credit card, for instance.”
VA and USDA
Neither the VA nor the USDA programs have strict requirements. Borrowers can accept gifts from almost anyone — exceptions include those involved in the sale, including the seller, builder/developer, or a real estate agent.
Tax implications of a mortgage gift
While gifting typically has no tax implications for the recipient, the donor may need to report the gift on their tax return. The IRS gift exclusion for 2023 is $17,000, meaning any gift above that amount needs to be reported.
In all cases, whether you’re the gift recipient or the donor, consult with a certified tax professional for guidance.*
Understanding seasoned money
If the gift is deposited into your account more than 60 days before you apply for the loan, your mortgage lender will consider it to be “seasoned money.”
The advantage of seasoned money is that it largely falls outside the lender’s scope of scrutiny. In other words, if you receive the gift in your bank account at least 60 days before your loan application, you may not need to provide the documentation or gift letter described above. This is something to keep in mind when timing your gift and mortgage application.
“We only ask for the previous two months of bank statements,” says Flynt. “So if the gift was deposited into the bank account before the last two months’ statements — which is generally 60 days — that money is considered ‘seasoned.’”
What is a gift of equity?
An alternative to the gift money scenario is the gift of equity. This is where a close relative or friend sells you their home for less than its appraised value. The difference between the home’s value and its sale price is the equity gift.
The process for receiving an equity gift is similar to that of receiving gift money for a down payment. Donor eligibility is limited to the same list, and eligible properties are limited to the same types. The seller must provide a letter that includes, among other things, the amount of gift equity and confirmation that it does not need to be paid back. Sellers and buyers should consult with a certified tax professional to discuss any tax implications.*
Gift money can help get you into a home
Gift money can be a big deal when you’re getting ready to buy a home. Just make sure you’re aware of the guidelines, communicating with your lender, and fulfilling all your documentation needs.
Frequently asked questions: Using Gift Money for a Down Payment
Can a friend gift me money for a down payment?
For a conforming loan, a close friend of your family — specifically, a godparent — can give you gift money for a down payment.
Can my parents give me money to buy a house?
Yes, according to Fannie Mae guidelines for conforming loans, any blood relative, including a parent, can give you money to make a down payment on a house.
Can I repay a gift?
Gift money used for a down payment cannot be repaid. Once repaid, the gift becomes a loan.
Who can gift money for a mortgage down payment?
According to the current guidelines from Fannie Mae, the following individuals can provide gift money for a down payment for a conforming loan:
• Spouse
• Child
• Other dependent
• Any relative related by blood, marriage, adoption, or legal guardianship
• Domestic partner
• Relative of a domestic partner
• Individual engaged to be married to the borrower
• Former relative
• Godparent
Can you use gift funds for an investment property?
Gift money cannot be used for investment properties financed with a conforming loan. However, it can be used for a primary residence with one to four units, or a second home.
How much can parents gift for a down payment in 2023?
There’s no maximum to how much a parent can provide as gift money. However, if the down payment is less than 20%, the borrower may need to provide at least 5% of the funds from their own assets.
What is Fannie Mae?
The Federal National Mortgage Association (FNMA) is commonly referred to as Fannie Mae. It’s a government-sponsored enterprise (ESA) that securitizes mortgage loans extended by private lenders.
*Any tax information provided in this article is for general purposes only and should not be relied on or construed as tax advice. Consult with a qualified tax preparer for more information.
