Rules for Using Gift Funds as a Down Payment

In spite of having sufficient income to afford a monthly mortgage payment, some would-be buyers defer a home purchase because they lack funds for a down payment. They assume a mortgage isn’t viable at the present time, but this thinking isn’t necessarily true.

If you don’t qualify for a zero-down mortgage (ex. VA or USDA), and if you don’t have enough in reserves for a down payment, there is a way to purchase a home sooner rather than later. Several mortgage programs allow borrowers to use gift funds for their down payment (and closing costs, for that matter). But while this option is available, there are rules about using gift money.

Who can donate gift funds?

Mortgage lenders are specific with regard to acceptable sources of gift money. And unfortunately, your down payment funds can’t come from just anywhere. As a general rule, gift funds used as a down payment on a primary residence or a second home must come from an approved relative, such as a spouse, fiancé, parent, sibling or grandparent.

Other sources are allowed in special cases. For example, some lenders permit gifts from a non-relative such as a godparent, a close family friend, an employer or a government agency. Before approving these funds, the bank verifies the relationship between borrowers and their donors to ensure the donor doesn’t have any interest in the property being purchased. Certain individuals—such as a builder, real estate agent, loan officer or the home seller—can not donate funds toward a borrower’s down payment.

How much can you receive as a gift?

Although personal gifts are accepted, some mortgage programs also limit the amount that can be used toward the down payment, closing costs, and other fees.

If you use a gift with a conventional loan, the donor can gift 100% of your down payment, and in most cases, you don’t have to contribute any of your own funds. You are, however, required to contribute a minimum of 5% of your own funds if the down payment is less than 20% of the purchase price and the property is either a two- to four-unit principal residence or second home.

If you apply for an FHA loan, you may use a gift to pay your down payment if it is received from an FHA approved donor. One of the benefits of using an FHA-insured mortgage is that the entire down payment can be in the form of a gift.

What documentation do you need for gift funds?

Gift funds must be documented so your lender can confirm the source of the money. When applying for a mortgage, it’s typical for borrowers to provide their lender with copies of personal bank statements for the past 60 days to show proof of assets. If you’re using gift funds to pay some or all of your mortgage costs, your mortgage lender may also request a copy of your donor’s bank statements to verify the outgoing transfer, assuming your donor doesn’t provide a certified check on the day of closing.

Before a lender allows the gift, you’ll also need to furnish a gift letter that states the name, address, and phone number of the donor. The letter should clearly identify your relationship to the donor, the amount of the gift, and the date funds were transferred into your account. Most importantly, the gift letter must specify that funds are a gift and not a loan. This is essential because some mortgage programs do not allow applicants to borrow funds for mortgage-related expenses.

The exception is a USDA home loan. This loan does not require a down payment, but you can borrow funds to pay for closing costs. This must be an unsecured loan, however. Keep in mind that your lender will include this debt when calculating your total debt-to-income ratio and determining your qualifying amount.


*Atlantic Coast Mortgage, LLC is not affiliated with or acting on behalf of or at the direction of FHA, VA, USDA, the Federal or State Government.

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