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 Money to Secure Your Home

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.

Understanding Gift Money Requirements

To avoid encountering such an unfortunate speed bump in your homebuying journey, make sure you follow all the loan requirements for your gift and properly document it.

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.

Benefits of Using Gift Money

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
• Another dependent individual
• Any blood, marriage, adoption, or legal guardianship relative
• Domestic partner
• Relative of a domestic partner
• Individual engaged to marry the borrower
• Former family member
• Godparent

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 needed for a one-to-four-unit principal residence or a second home if the down payment totals 20% or more.
• Conversely, for a one-unit principal residence with a down payment less than 20%, no buyer contribution is necessary.
• However, a minimum buyer contribution of 5% is mandatory for two-to-four-unit principal residences or second homes with a down payment less than 20%.

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 methods are acceptable for documenting gift funds:

• Providing a copy of the donor’s check along with the borrower’s deposit slip.
• Presenting a copy of the donor’s withdrawal slip alongside the borrower’s deposit slip.
• Including records of electronic fund transfers from the donor’s account to either the borrower’s account or the closing agent.
• Submitting a copy of the donor’s check made out to the closing agent.
• Providing a settlement statement that verifies 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.”

In the down payment gift letter, the gift giver is expected to include:

• Their name, home address, phone number, and email address
• Their relationship to you
• The address of the home you are 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
• A statement confirming the gift nature, stating it does not require repayment
• 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 of receiving an equity gift resembles receiving gift money for a down payment. Donors from the same list are eligible, and eligible properties include the same types. The seller must furnish a letter stating the gift equity amount and confirming it requires no repayment, among other details. Sellers and buyers should seek advice from a certified tax professional regarding any tax implications.

Gift money can help get you into a home

Using Gift Money for Your Home Purchase

Gift money can be a significant advantage when buying a home. Here’s how to make the most of it:

Benefits of Gift Money

Explore the advantages of using gift funds for your down payment or closing costs:

Requirements for Using Gift Money

Understand the specific documentation and guidelines needed when using gift money for your home purchase:

Tips for Receiving Gift Money

Learn how to properly receive and document gift funds to streamline your home buying process:

FAQs

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 individuals
• Any relative connected by blood, marriage, adoption, or legal guardianship
• Domestic partner
• Relative of a domestic partner
• Individual engaged to marry the borrower
• Former family member
• 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.