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Using Gift Funds for Your Down Payment

Gift funds for a mortgage down payment are financial contributions from eligible donors (typically family members) that the borrower uses toward the down payment, closing costs, or reserves. Each loan program has specific rules governing eligible donors, minimum borrower contribution requirements, and documentation standards including a signed gift letter and a verifiable paper trail showing the transfer of funds from donor to borrower or closing agent.

Key Takeaways

  • Every major loan program permits gift funds for down payment and closing costs, but eligible donor definitions and documentation requirements differ by program.
  • A signed gift letter must include the donor's information, gift amount, property address, relationship to borrower, and a statement that no repayment is expected.
  • Conventional loans restrict donors to family members, fiancés, and domestic partners; FHA and VA permit broader donor categories including employers, close friends, and charitable organizations.
  • FHA requires no minimum borrower contribution, allowing the entire 3.5% down payment to come from gift funds.
  • Conventional 97% LTV and HomeReady programs also allow 100% gift-funded down payments with no minimum borrower contribution from the borrower's own funds.
  • The documentation trail must include evidence of the donor's ability to give, proof of the transfer, and proof of receipt by the borrower or closing agent.
  • Gift of equity transactions allow a family member to sell below market value, with the difference treated as the borrower's equity toward the down payment.
  • Gift funds deposited well in advance of the application may be considered seasoned (typically 60-90 days) and may not require full gift documentation.

How It Works

How Gift Funds Are Documented for Underwriting

The documentation process begins with the gift letter, which is prepared and signed before or at the time the funds are transferred. The gift letter establishes the donor’s intent, the gift amount, and the relationship between donor and borrower. Next, the transfer itself must be documented. If the donor writes a check, the lender needs a copy of the cancelled check (or a copy of the check and the donor’s bank statement showing the debit). If the donor wires the funds, the wire transfer confirmation serves as documentation.

The borrower’s receipt of the funds must appear on a bank statement or be documented through the closing disclosure if funds are wired directly to the closing agent. If the gift arrives as a large deposit on the borrower’s bank statement during the underwriting period, the underwriter will issue a condition requiring the gift letter and supporting documentation. All documents must be consistent in amounts, dates, and account numbers. Any discrepancies between the gift letter amount and the actual transfer amount will require explanation or a revised gift letter.

How Donors Document Their Ability to Give

Lenders require evidence that the donor has sufficient funds to provide the gift. This is typically satisfied by a bank statement, investment account statement, or other financial statement from the donor showing a balance sufficient to cover the gift amount. The statement must be recent (within the most recent statement cycle). The donor’s account number may be partially redacted for privacy, but the name, institution, balance, and relevant transaction must be visible.

If the donor liquidates assets (such as selling stocks or withdrawing from a retirement account) to fund the gift, the lender may need documentation of the liquidation transaction in addition to the account statement. The goal is to confirm that the gift funds came from a legitimate and documented source, not from an undisclosed loan or transaction involving prohibited parties.

How Gift of Equity Transactions Are Structured

In a gift of equity transaction, the seller (who must be a family member for most programs) agrees to sell the property below the appraised market value. The lender orders an appraisal to establish the current market value. The mortgage is based on the lower of the appraised value or the purchase price for LTV purposes (with the gift of equity treated as the borrower’s down payment). The settlement statement reflects the actual (lower) purchase price, and the gift letter documents the difference between the appraised value and the sale price as the gift of equity.

No cash changes hands for the equity portion of the gift. The seller simply receives less than market value at closing. The borrower benefits from an immediate equity position without needing to provide a cash down payment. If the gift of equity exceeds 20% of the appraised value, no mortgage insurance is required on a conventional loan. This structure is particularly common in intergenerational property transfers where parents want to help children purchase a home they already own.

Related topics include first-time homebuyer programs and benefits, co-signers and co-borrowers on a mortgage, non-occupant co-borrower rules and guidelines, down payment assistance programs explained, and special borrower situations: a decision guide.

Key Factors

Factors relevant to Using Gift Funds for Your Down Payment
Factor Description Typical Range
Eligible Donors
Minimum Borrower Contribution
Documentation Complexity
Seasoning of Deposited Funds

Examples

Scenario: Parents gifting down payment for an FHA purchase
Outcome: FHA allows 100% of the down payment from gift funds with no minimum borrower contribution. The $10,000 gift covers the $9,625 down payment with $375 remaining toward closing costs. The borrower's $3,000 in savings covers additional closing costs. Underwriting accepts the gift with the complete documentation package. No issues arise because the paper trail is complete and the donor is a qualifying family member.

Scenario: Gift from a friend on a conventional loan vs. FHA loan
Outcome: The conventional loan underwriter rejects the gift because the friend is not a family member, fiancé, or domestic partner. The $15,000 cannot be used toward the down payment on a conventional loan. The borrower's options are to switch to an FHA loan (which accepts gifts from close friends with documented relationship), find a family member to provide the gift, or come up with additional personal funds. The borrower switches to FHA, which accepts the gift with documentation of the friendship and the friend's ability to give.

Scenario: Gift of equity from parent selling home to child
Outcome: The LTV is calculated as $280,000 / $350,000 = 80%. The gift of equity provides a 20% equity position, so no PMI is required. The parent provides a gift of equity letter documenting the below-market sale and the $70,000 gift amount. The closing statement reflects the $280,000 purchase price. The child obtains the mortgage without needing any cash for a down payment, and the 80% LTV avoids mortgage insurance entirely.

Scenario: Gift funds with incomplete paper trail causing underwriting delays
Outcome: The loan cannot proceed to clear-to-close until the grandmother's bank statement is received, reviewed, and accepted. The delay extends the closing timeline by 10 days while the statement is obtained and submitted. Had the gift been deposited 90 days before application, it may have been treated as seasoned funds without requiring the donor's bank statement. Alternatively, had the grandmother wired the funds directly to the title company at closing, the wire confirmation alone may have sufficed.

Common Mistakes to Avoid

  • Depositing gift funds without first obtaining a gift letter
  • Receiving a gift from an ineligible donor for the loan program selected
  • Routing gift funds through multiple accounts before depositing
  • Having the donor pay the borrower in cash
  • Confusing gift funds with seller concessions or interested-party contributions
  • Failing to disclose gift funds on the loan application

Documents You May Need

  • Signed gift letter from the donor including donor name, address, relationship to borrower, gift amount, property address, and statement of no repayment expectation
  • Donor's bank or financial account statement showing sufficient funds and the withdrawal or transfer of the gift amount
  • Evidence of transfer: wire transfer confirmation, copy of cancelled check (front and back), or electronic transfer receipt
  • Borrower's bank statement showing receipt and deposit of the gift funds
  • Gift of equity letter (for below-market family sales) documenting the difference between appraised value and sale price
  • Appraisal report supporting market value (required for gift of equity transactions)
  • Relationship documentation if the donor relationship is not immediately obvious (for close friend gifts on FHA or VA loans)
  • Settlement statement or closing disclosure showing direct application of gift funds at closing (if funds are wired directly to the closing agent)

Frequently Asked Questions

Can my entire down payment come from a gift?
It depends on the loan program. FHA allows 100% of the 3.5% down payment from gift funds with no minimum borrower contribution. Conventional 97% LTV, HomeReady, and Home Possible also allow the entire down payment from gifts. VA and USDA require no down payment at all, so gifts are typically applied to closing costs. Standard conventional loans above 95% LTV may require some borrower contribution from personal funds.
Who can give me gift funds for a mortgage?
Eligible donors vary by program. Conventional loans accept gifts from family members (related by blood, marriage, adoption, or legal guardianship), fiancés, and domestic partners. FHA broadens this to include employers, close friends with documented relationships, charities, and government agencies. VA additionally allows gifts from the seller. USDA primarily accepts gifts from family members and documented close friends.
What information must be in a gift letter?
The gift letter must include the donor's name, address, and contact information; the exact dollar amount of the gift; the property address; a statement of the donor's relationship to the borrower; and a clear declaration that no repayment is expected or required. Both the donor and the borrower must sign the letter. Some lenders provide a specific template.
Does the donor need to provide bank statements?
Yes. The lender requires evidence that the donor had sufficient funds to provide the gift. This is typically documented with the donor's most recent bank statement or financial account statement showing a balance equal to or greater than the gift amount. The statement must show the withdrawal or transfer matching the gift amount. Account numbers may be partially redacted.
What is a gift of equity and how does it work?
A gift of equity occurs when a family member sells a property to the borrower below the appraised market value. The difference between the appraised value and the sale price is treated as the borrower's equity. For example, if a home appraises at $300,000 and the family member sells it for $240,000, the $60,000 difference is the gift of equity, giving the borrower a 20% equity position without a cash down payment.
Can I receive a gift after my loan application has been submitted?
Yes, but the timing affects documentation requirements. Gifts received during the underwriting period will appear as large deposits on bank statements and require full gift documentation (gift letter, donor statements, transfer evidence). If the gift was deposited 60-90 or more days before application, it may be treated as seasoned funds, potentially simplifying the documentation. Coordinate with your loan officer on timing.
Are there tax implications for gift funds used as a down payment?
The gift tax implications fall on the donor, not the recipient. In 2024, a donor can give up to $18,000 per recipient per year without filing a gift tax return. Married donors can give up to $36,000 jointly. Gifts above these annual exclusion amounts require the donor to file IRS Form 709, though no tax is typically owed unless the donor exceeds the lifetime gift tax exemption. The borrower does not pay income tax on the gift .
Can I use gift funds for reserves?
Gift funds can be used for reserves on FHA loans. For conventional loans, Fannie Mae allows gift funds for reserves only when the gift also covers the down payment, and the borrower has made a minimum down payment from their own funds or the program allows 100% gift-funded down payments. The specific rules for using gifts for reserves depend on the loan program and investor guidelines.
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