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How to Use Gift Money for a Down Payment

Gift money is a cash donation — usually from a close relative — that you can use for your down payment, closing costs, and other fees. However, there are a few rules and requirements to keep in mind when using gift money for a down payment on a home. 

Here’s what you need to know before using gift funds for a home purchase.

Can Someone Gift You Money for a Down Payment?

Saving money for a down payment isn’t easy, especially if you’re a first-time homebuyer. A common misconception is that you need 16% to 20% for a down payment, but the average down payment for first-time buyers ranges between six and seven percent. Even then, a six percent down payment on a $350,000 house, which is $21,000, isn’t a small amount. 

This is why gift money for a down payment has been a lifesaver for buyers who don’t have the cash ready to buy a home. In fact, 28% of younger millennials used gift money from a relative or close friend to purchase their home in 2021.

Most conventional mortgage lenders allow buyers to use gift money for a down payment. However, this money must come from an acceptable source and lenders require recipients to disclose the source of these funds.

What Is a Gift Letter for a Mortgage Down Payment?

When you use gift funds, your lender may require you to provide a gift letter. A gift letter for a down payment is a written statement explaining who is gifting the money, where the funds are coming from, and the relationship between the donor and recipient. 

The gift letter must include:

If you need to provide additional information with your gift letter, your lender will let you know what you need.

Are you planning to use gift money for a down payment? Find a Total Mortgage branch near you and speak to a mortgage advisor today.

Rules for Using Gift Money for a Down Payment

There aren’t too many rules for using gift money for a down payment, but lenders are less likely to allow gift money if it didn’t come from a family member, such as a parent, grandparent, or sibling. 

You may be asked to provide a paper trail to prove the transfer of the gift money into your bank account from the donor’s account.

To verify the availability and transfer of funds, you may be asked to provide one of the following:

You must also prove that this money isn’t a loan that must be repaid. Gift money from a loan could affect your ability to repay your mortgage, meaning the lender would take a greater risk by giving you a mortgage.

Another important rule is that gift funds cannot come from anyone with a stake in the transaction. This would include a real estate agent, seller, broker, or other interested parties.

These same rules apply no matter the type of mortgage, such as a conventional mortgage, FHA, VA, or USDA.

However, conforming loans, which are those backed by Fannie Mae and Freddie Mac, require that gift funds for home purchases come from a family member of the borrower. Fannie Mae and Freddie Mac define family as:

Government-backed loans aren’t as strict. Gift money for a down payment can come from a close friend, family member, charitable organization, an employer, labor union, or government agency.

What Are the Limits for Receiving Gift Money for a Down Payment?

There’s no limit on the amount of money you can put down using gift funds. However, you may be required to pay a portion of your down payment from your own personal funds depending on your property type and the amount being put down. 

For example, if you’re buying a second home or a multi-unit property, you may be required to contribute at least 5% of your personal funds if you’re down payment is under 20%. 

After this minimum contribution, gift money can be used for the remainder of the down payment. If you’re purchasing an investment property, your down payment must come entirely from your own funds.

Explore Your Mortgage Options With Total Mortgage

One of the biggest advantages of gift money is that it allows you to put down a bigger down payment than you would have without it. However, you must meet your lender’s requirements as far as who is gifting you the money, where the funds are coming from, and your relationship with the donor. Make sure you keep all records of the transaction to show your lender.

Mortgage shopping? Be sure to explore Total Mortgage’s loan program options when you’re ready to purchase a home. If you have any questions about your mortgage options, schedule a meeting with one of our mortgage experts.
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