Down Payment Gift Guidelines
According to a National Association of Realtors survey in 2020, 26% of first-time buyers and 7% of repeat buyers cited saving a down payment as the most difficult part of the homebuying process. But before accepting a mortgage down payment gift, there are a few rules to know:
Only certain entities can make down payment gifts.Down payment gift amounts may be limited based on the type of loan.The money must be a gift. It can’t be treated as a loan.It must be documented with a down payment gift letter.
In terms of who can make down payment gifts, the same rules apply as when gifting money to family members. You may receive down payment gift funds from your parents, siblings, or other relatives, or you can receive a gift through an approved organization. That can include mortgage down payment assistance programs offered by state governments or non-profit organizations.
Down Payment Gift Rules: Conventional Loans
Fannie Mae and Freddie Mac guidelines allow for down payment gifts on conventional mortgage loans. Gifts can come from:
A spouseA child or other dependentsA fiancé or domestic partnerAnyone else related to you by blood, marriage, adoption, or legal guardianship
The entire amount of your down payment can come from gifted funds if you’re buying a one- to four-unit home to use as a principal residence or a second home. The loan-to-value ratio must be 80% or less. You must contribute at least 5% of the down payment from your own funds if you’re buying a two- to four-unit home or a second home with an LTV greater than 80% if you’re using a Fannie Mae mortgage. Freddie Mac mortgages require at least 5% from the borrower when the loan is secured by a second home and when the LTV is greater than 80%.
Down Payment Gift Rules: FHA Loans
The minimum down payment required for an FHA loan is 3.5% with a 580 credit score. According to the Single Family Housing Policy Handbook, down payment gifts can come from:
Family membersClose friendsYour employer or labor unionCharitable organizationsDown payment assistance programs
The money given to you by one of the above sources must not have a repayment requirement to qualify as a gift.
Down Payment Gift Rules: VA Loans
VA loans are designed for veterans and their families to make homebuying affordable. A VA loan doesn’t require a down payment. You can use gifted funds to put money down on the home’s purchase if you want to reduce the amount you have to finance.
Down Payment Gift Rules: USDA Loans
Like VA loans, USDA loans don’t require a down payment for those who meet certain income qualifications. But you could bring gifted down payment funds to the closing table to reduce the amount you need to finance.
The Down Payment Gift Letter
You’ll need a down payment gift letter if you’re buying a home using gifted funds. Your letter for mortgage down payments with conventional loans should include:
Your nameThe name and address of the person making the giftThe amount that’s being gifted to youThe address of the home you’re buyingThe relationship of the person who’s making the giftWhere the money’s coming from (such as a checking account, savings account, investment account)A clear explanation that the money is a gift, not a loan because borrowed funds are not allowed for down payment gifts
The down payment gift letter should be signed by you and the person or entity making the gift. It should also be dated. It should include the date that the gift was made to you or will be made to you if the funds haven’t been transferred yet.
Other Documentation You’ll Need
It’s important to have a paper trail showing the movement of funds from the donor’s account to yours. Fannie Mae lists the following four methods of documentation as acceptable for conventional loans:
A copy of the donor’s check and the borrower’s deposit slipA copy of the donor’s withdrawal slip and the borrower’s deposit slipA copy of the donor’s check to the closing agentA settlement statement showing receipt of the donor’s check
The lender must verify that the person gifting funds gave the closing agent a certified check, a cashier’s check, or another official check if down payment gifts aren’t transferred before settlement.
Tax Implications of Gifting Money to Family Members
You won’t incur any tax liability as the person receiving a down payment gift, regardless of the gift amount. But the person who’s making the gift to you can trigger a gift tax if the amount exceeds the annual exclusion limit. For 2021, for instance, parents who are married and who file a joint return can gift up to $32,000 per child for a mortgage down payment (or any other purpose) without incurring a gift tax as of the tax year 2022. This is up from $30,000 in 2021. The gift tax exclusion limit for single filers is $16,000.
Other Ways to Raise Down Payment Funds
Once you’ve figured out how much you need for a mortgage and down payment, consider other possibilities for raising the money you need to buy a home. Do you qualify for a no-down payment VA or USDA loan? Weigh the pros and cons of getting an FHA loan with just 3.5% down. You might also extend your buying timeline and work on saving the money. Or you might decide to sell things you own or start a side hustle or business to earn cash that you can save. Down payment assistance programs are another option. These programs can provide grants and cash assistance to help you cover down payments and, in some cases, closing costs. But there are eligibility rules. A quick search online can help with finding these programs in your area.
