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When applying for a mortgage, lenders want to know where your down payment money came from, including if any of it was gifted. That's because gifted money can artificially inflate your bank account, and lenders need a realistic sense of how much mortgage you can afford. They also want to ensure that gifted money isn't a loan in disguise that would add to your debt load.
Down payment gift rules vary by mortgage type, so here's what you need to know if you plan to buy a home with gifted funds or help a loved one buy a home.
What Is a Down Payment Gift?
A down payment gift is money given by someone, usually a family member, to a homebuyer to help them afford a mortgage down payment or similar expenses like closing costs.
To use gift money, you have to follow the rules imposed by the lender and/or government agency insuring the loan, if applicable. Small amounts, like a $100 birthday check, likely don't need to be documented. Lenders typically want to know about gift money that exceeds half of a household's total monthly income. So, if you bring in $3,000 monthly and a relative gifts you $1,800 to help with your down payment, you'll likely need to account for that money.
Down Payment Rules by Loan Type
Here are the restrictions you'll encounter for each of the most common home loan types. You generally won't find dollar amount restrictions; the rules focus on who can give money and what it can go toward.
Conventional Loan Down Payment Gift Rules
With conventional loans, lenders usually allow gift money for some or all of your down payment, closing costs and financial reserves you'll use to pay the mortgage.
However, the acceptable sources are limited to family members and romantic partners, and gift funds can't be used on investment properties.
You'll need to provide a gift letter with information including the gift amount, the donor's contact information and relationship to you and the donor's statement that repayment isn't expected. Borrowers must also provide evidence that the donor has sufficient funds or proof of transferred gift funds.
FHA Loan Down Payment Gift Rules
FHA loans are government-backed loans intended to help first-time or low-to-moderate-income families purchase a primary residence, with down payment requirements as low as 3.5%.
FHA loans accept gift money for down payments, closing costs or reserves you'll use to pay the mortgage. It can come from a wider variety of sources than conventional loans:
- Your family member
- A close friend
- Your employer or labor union
- A charitable organization
- A government agency or public entity with a homeownership assistance program for first-time or low-to-moderate income homebuyers
To use these funds for some or all of your down payment, you must get the donor to sign and date a gift letter. It should include the donor's contact information, relationship to you, monetary amount and a statement that repayment isn't required.
You're required to document the transfer of funds, such as the donor's bank statement showing the withdrawal and deposit into your account, or a check copy as evidence of payment plus the donor's bank statement to show they're good for it.
VA Loan Down Payment Gift Rules
These government-backed loans help eligible military-connected home buyers purchase a primary residence. VA loans don't require down payments, but you can put money down if you want to start off with equity.
These loans do charge funding fees, though some borrowers are exempt. This fee can be steep, but it can be lowered by putting at least 5% down. If you can't afford to pay outright, it can be rolled into the loan (closing costs can't).
You can receive gift money from just about any donor as long as they aren't involved in the transaction, like your lender or real estate agent.
Gift funds can be used toward an optional down payment or your closing costs—or to cover the funding fee if you don't want to roll it into your loan. However, you cannot use gift funds to meet your reserves requirement in the underwriting process.
You'll need a gift letter with the donor's contact information, relationship, the amount donated and confirmation that the donor doesn't expect repayment. You also need documentation of the transfer of money from the donor to the homebuyer.
USDA Loan Down Payment Gift Rules
Another form of government-backed mortgages, USDA loans are intended for low-income individuals living in suburban or rural areas, and they have no down payment requirement.
USDA loans do not permit gift funds to count as financial reserves since you didn't save the money yourself, but they can cover the loan's closing costs.
Gift money for USDA loans can come from any donor who doesn't have an interest in the transaction. You need a gift letter confirming funds don't have to be repaid, along with bank statements to show evidence of funds or a copy of a check or money order if the gift funds were given directly to the title company.
How to Document a Down Payment Gift
In the mortgage application process, lenders want an accurate picture of your financial situation, including your assets and debts. You're required to disclose on your application if you're putting gift money toward any part of the loan.
Lenders also require you to submit a gift letter. Ask your lender if they'll provide a template or if you need to find one. Either way, learn what exactly needs to be included and how to document the transfer of funds since requirements are similar across lenders but can vary.
Alternatives to Down Payment Gifts
If down payment gifting rules sound too onerous, there are other ways to buy a house with minimal savings, including:
- Government-backed mortgages: One of the perks of government-backed mortgages is their low (or no) down payment requirements. VA and USDA loans require no down payment at all, and FHA loans require as little as 3.5% down. If you don't have someone to gift you money, the amount needed is low enough that it may be feasible to scrape together funds without assistance.
- Zero down payment loans: Besides VA and USDA loans, there aren't many zero down payment options, but it's worth checking your eligibility for local and national down payment assistance programs. Some reduce or negate down payment requirements based on factors like your career field or buying in a specific neighborhood.
- Explore other low down payment options: Some conventional loans now offer very low down payments; for example, Wells Fargo has a conventional loan program for first-time homebuyers with as low as 3% down. Freddie Mac's Home Possible Loan also permits down payments as low as 3% and is intended for first-time or low- or moderate-income buyers.
- Save more: Consider holding off on homebuying until you've saved more for a down payment so it's easier to get a mortgage. With savings interest rates the highest they've been in years, you'll make faster progress when saving for a down payment.
FAQs
No. By definition, mortgage gifts are not loans and must not have a repayment requirement.
That's why lenders require the gift letter to state the donor doesn't expect repayment. When evaluating eligibility, lenders look at your debt and income. Your ability to repay changes if it turns out you owe money to a relative on top of the mortgage.
This document is required by lenders to disclose the nature of any gift funds you plan to use for your mortgage. Your lender may provide a template for you and the donor to fill out, or you can create one using an online template.
Rules vary by the loan type and the lender. You typically can't receive gift money for any loan from someone with a vested interest in the purchase, such as the lender, real estate agent or home builder. Beyond that, it depends. As stated above, FHA and USDA allow a wide range of donors, while conventional loans are restricted to family members.
Down payment gift money isn't taxed by default. However, the IRS requires any financial gifts to be reported if they exceed an annual cap.
For gifts given in 2023, the IRS charges gift tax when they exceed $17,000 to one person. The donor is typically responsible for paying this tax, though it's possible to make an arrangement to have the recipient pay instead. The IRS recommends working with a tax professional if you desire that route.
Is Your Credit Mortgage-Ready?
Remember that your down payment and bank balance are only part of the mortgage approval process. Your credit report is closely scrutinized by lenders for insight into your payment history, debt load and loan experience. The better your credit score, the more likely you'll be approved—and land lower lower interest rates and fees.
Before applying for a mortgage, it's smart to check your credit score to see where things stand and know if you should take action to improve your score first.