Down Payment Gift Rules: A Complete Guide to Using Gift Funds for a Mortgage

Using a financial gift from family or friends for a down payment is a common and effective strategy, with 39% of recent home buyers utilizing this option. However, to ensure a smooth mortgage approval process, it's critical to understand and follow specific lender rules. Proper documentation is the most important factor when using gift money, as lenders must verify the funds are a true gift, not a loan. This guide details the rules for conventional, FHA, and other government-backed loans.

What Constitutes a Down Payment Gift?

A down payment gift is a financial contribution from a donor—typically a family member or close friend—to assist a home buyer with the upfront cost of purchasing a home. The defining characteristic is that it is a "bona fide gift," meaning there is no expectation of repayment. For the lender, this distinction is crucial because it prevents the borrower from taking on additional, hidden debt that could impact their ability to make mortgage payments. Gifts are becoming increasingly popular, even appearing on wedding registries as couples prioritize homeownership.

What Are the Mortgage Down Payment Rules by Loan Type?

Loan programs have distinct guidelines for gift funds. Understanding these differences is essential for choosing the right mortgage and preparing the correct paperwork.

• Conventional Loans (Fannie Mae): For a single-family primary residence, there is no minimum borrower contribution. This means the entire down payment can come from a gift. The donor must be a relative or someone with a clearly defined familial-type relationship, such as a domestic partner or fiancé(e).
• FHA Loans: The borrower must contribute a minimum cash investment of 3.5% of the purchase price from their own funds. However, any amount beyond that can be gifted. Acceptable donors include relatives, employers, labor unions, and close friends (with a documented relationship). The key rule is that the gift must be non-repayable.
• VA and USDA Loans: These government-backed loans often have the most flexible gift policies, frequently allowing the entire down payment (if required) to be a gift from a family member.

How Do You Properly Document a Gift for a Down Payment?

Documentation provides the paper trail lenders need to approve gift funds. Any deposit into your bank account that equals or exceeds 50% of your monthly income will require sourcing. The required documents typically include:

1. Provide a Formal Gift Letter A gift letter is a signed and dated document from the donor that must include:

• The donor's name, address, phone number, and relationship to you.
• The exact dollar amount of the gift.
• The address of the property being purchased.
• A clear statement that the money is a gift and does not require repayment.

2. Show a Complete Paper Trail The movement of funds must be traceable. You will need to provide:

• Donor’s Documents: A bank statement from the donor showing the funds were available before the transfer. A copy of the withdrawal slip or wire transfer confirmation is also helpful.
• Your Documents: Your bank statements showing the gift funds being deposited. The amount must match the gift letter exactly. Lenders typically require two months of statements.

Pro Tip: Based on our experience assessment, wiring the gift funds directly to the title company at closing can sometimes simplify the process and reduce the number of documents required from the donor, especially with conventional loans.

Who Is Allowed to Gift You Down Payment Money?

Eligible donors vary by loan type, but generally, they must have a personal relationship with you and no vested interest in the sale.

• Relatives: This includes spouses, parents, siblings, children, grandparents, aunts, and uncles. This is universally accepted across all loan types.
• Extended Relationships: For conventional loans, this can include domestic partners, fiancé(e)s, and even godparents.
• Other Entities: For FHA loans, employers, labor unions, and charitable organizations are also acceptable donors.

Important: The following parties are not permitted to be donors: the home seller, the real estate agent, the builder, or the developer. Their involvement would be considered a conflict of interest.

To successfully use a down payment gift, start the conversation with your loan officer early. They can provide the specific gift letter template required by your lender and guide you through the entire process, preventing costly delays in your home purchase.