How to Use Gift Money for your Down Payment

Couple hugging in front of new house

If you’re looking to become a homeowner and find yourself struggling to save enough money for your down payment, a generous relative or friend can help by gifting you money. The gift must be documented properly through financial statements and a gift letter. When using a gift you will need to follow the steps your loan officer lays out in order for this to be executed correctly. One thing to remember is that a gift can only be used when you’re purchasing a primary residence or second home. If you know a gift will be needed to cover the down payment or closing costs of your loan, it is best to submit the gift letter and documents as early as possible in the loan process.

Lenders require you to provide detailed documentation whenever a gift will be used in the transaction. This gift letter includes the name of the donor, their relationship to you, the date, amount of the gift, the financial account they will be using to gift the funds, and property address. Both parties will need to sign the letter acknowledging that this money is being given with no expectation of repayment.

Your loan program also plays a role in what other documents are needed. If you’re using Federal House Administration (FHA) loan, the gift could cover your entire required down payment. This will require you to provide a paper trail of bank statements that follow the gift money from the donor through the financial system to you. This shows the lender that the donor has made a gift, proved it has been deposited, and has cleared your account.

If you’re using a conforming loan, such as Freddie Mac or Fannie Mae, the guidelines are more lenient. Lenders will want to see documentation that the donor’s check has cleared and a bank statement showing the gift funds have been deposited. Keep in mind that the entire down payment can only be gifted if you’re putting 20% down. If you’re using less than 20% down, some of the money has to come out of your own pocket. The donor will want to consider that the IRS imposes a gift tax on certain monetary gifts if it exceeds the exemption limit in a single year and this is paid by the person donating the money.

Your loan officer is always the best resource to help answer any questions along the way in the process and is always available to help achieve your goal of becoming a first-time home buyer or a repeat buyer.