Mortgage Down Payment with Gift Letters

What you need to know about using gift money as a down payment for your home

For many folks, especially first-time homebuyers, a down payment is considered the biggest hurdle in purchasing a home. Even with a variety of mortgage options available today—some with a low down payment or even zero down payment, you may still need a little extra help from a friend or relative. With their help, pulling together a down payment may be easier than you think. Here’s the full scoop on how you can use gift money as a down payment for your home.

Work backwards: your mortgage matters

Any documents with personal or financial information should be shredded. Keep your Social Security number private—don’t carry it in your wallet. Although you don’t have to know what type of mortgage you’ll have before collecting gift money for a down payment, it can help you communicate what you need to those who may be offering said money. It will also help you determine if, and how much, of your own money will have to factor into the down payment amount so there are no surprises later.

Here’s a quick rundown:

For FHA loans: The down payment amount for an FHA loan can be as little as 3.5%. If your credit is between 580-619, at least 3.5% of your down payment has to be of your own money. And if your credit score is below 580, a minimum of 10% for a down payment is needed. If putting 20% or more down on an FHA loan, the down payment can come from gift money.

For VA loans: Although about 90% of borrowers use VA loans with no down payment, there’s a perk to paying down as little as 5%. If you are a VA loan borrower that puts down at least that amount, the VA Funding Fee shrinks.

For conventional loans (backed by Fannie Mae or Freddie Mac): If you’re putting down 20% or less on your home purchase, the entire down payment can be from gift money. However, anything above 20% means you’ll have to dip into some of your own funds to contribute toward the down payment.

Think before you post anything too personal on social networks. Avoid posting pictures that could reveal your home address, and be aware of posting something that could be used to reset a password, such as a pet name, mother’s maiden name, or high school attended.

“How much can I receive as a down payment gift?”
  • The current 2019-2020 rules are that anyone can gift up to $15,000 to someone else in a year, without really having to deal with the IRS4.
  • This annual amount is per person, which means parents could offer up to $15,000 each, for a combined total of $30,000. Individual friends of family members would be able to offer up to $15,000.
  • You can be given more than these limits, however…
  • Anything beyond these amounts, those giving the down payment gift money will have to file a gift tax return (IRS Form 709). Note: This isn’t like income tax where you automatically have to pay some sort of gift tax. It’s more of a way for the IRS to keep track of gift amounts given.

Note: While these rules mean there’s usually no cap on how much gift money can be given toward a down payment, this only applies to the purchase of your primary home. If you’re receiving gift money to buy a second home or investment property, you’ll have to tap into your own funds for at least 5% toward your down payment.

Get the gift (and your relationship with the giver) down on paper

In some cases, you might get funds from a government program to assist in purchasing your home. If that’s the case, you don’t need to prove anything extra about where the funds have come from. However, with friends and family, your lender is going to want to know who the money is coming from and that the money truly is a gift with no strings attached. In fact, telling your lender the money is a gift when it’s actually expected to be paid back can be considered mortgage or loan fraud. As innocent as it may seem in the moment, lenders need to know about all types of loans you have because it factors into your debt-to-income ratio.

That being said, for actual gifts, you still need a letter that covers:
  • Your (the borrower’s) name
  • The name of who is donating the gift money and their relationship to you
  • The donor’s address and phone number
  • Note of how much money is being gifted
  • Acknowledgment that you aren’t expected to pay the gift back
  • A statement that the gift giver has no conflict of interest in the purchase or sale of the property (an example: the money isn’t coming from your lender, real estate broker, etc.)
  • The address of the home you’re buying
  • Signatures from you and the person gifting you the money
Letting the money marinate (but not mix with other funds)

There is a term called “seasoned money”, which in this case means that the money gifted to you has had some time to sit in your account. As a rule of thumb, it’s a good idea to have the money gifted for your down payment in your own account for at least a couple of months before you start the process of purchasing your home. This lets your lender see the funds are stable, and that you haven’t just scraped together a bunch of cash at the last minute. It’s also best to deposit the gift money into an account that’s separate from your personal checking or savings. This also includes not piling on any extra funds of your own to the gifted amount. Following these steps creates a clean, confusion-free paper trail. Anything less, and your lender might reject the gift amount as part of the down payment altogether.

A quick cheat-sheet to bring all this info together
Consider All Expenses Of Getting Into Your Home
  • Know your mortgage type
  • Understand the down payment requirements for it, including what you may need to contribute
  • Don’t forget to factor in other closing costs like inspections/appraisals, underwriting fees, etc.
Confirm Your Down Payment Gift(s) and Conditions
  • Get a signed letter from each gift donor
  • Make sure it’s actually a gift and not a loan
  • Both sides understand the limits and potential tax implications for the gift money
Acquiring The Actual Gift Money
  • Make sure both sides keep a clean paper trail of the money gifted
  • Do not mix the gifted money with your personal savings or checking accounts
  • “Season” the money by having it in your own account for at least two months leading up to starting the buying process
Bottom line: down payment gifts can be a hassle-free way to make buying your new home even more affordable

Although there are the rules mentioned above, using down payment gift money is pretty straightforward. Follow these guidelines and let your lender know upfront that gift money is part of your down payment game plan. Then both sides will be fully aware of how much can be used for your down payment, and whether you’ll need to use any funds of your own.