The Rules for Documenting Mortgage Down Payment Gifts

A couple cooking in a new home they bought with mortgage down payment gifts.

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Saving a down payment is one of the most important—and often most challenging—aspects of buying a home. The larger your down payment, the less you have to finance. That, in turn, could lead to a lower interest rate and a lower monthly payment, and it could help you to avoid costly private mortgage insurance. 

Unfortunately, many would-be buyers struggle with getting a down payment together. In a 2017 Zillow survey, nearly 70% of renters said saving a down payment was the biggest hurdle to buying a home.

If you're ready to become a homeowner, asking Mom and Dad to help with your down payment may have crossed your mind. While down payment funds can be gifted, there are certain rules that must be followed, including drafting a down payment gift letter. 

Down Payment Gift Guidelines

The amount of down payment funds that can be gifted from your parents or another family member typically depends on the type of mortgage loan involved. If you have a credit score of 580 or above and you are eligible to get an FHA loan with a 3.5% down payment. If your credit score falls below 580, you will need to put at least 10% down. If you choose to put down 20% or more on an FHA loan, then the entire down payment can be a gift. If your credit score falls between 580 and 619, then 3.5% of your down payment must come from your own income. FHA loans only allow gift funds to be used on primary residences.

On the other hand, if you're using a conventional Fannie Mae or Freddie Mac loan, the entire down payment can be a gift if you're putting down 20% or less of the home's purchase price. If your down payment is more than 20%, some of the money has to come out of your own pocket. 

Down Payment Gift Letter Rules

Once you've worked out how much of your down payment funds can be gifted, the next step is writing a down payment gift letter. This is required by the lender any time part or all of your down payment is a gift. There's a specific process for writing the letter and documenting the gift. 

For the letter itself, there's no standard form. You can type it up yourself or ask your real estate agent or broker to help but generally, you'll need to include:

  • Your name and the name and address of the person making the gift
  • The amount that's being gifted to you
  • The address of the home you're buying
  • The relationship of the person who's making the gift
  • Where the money's coming from (i.e. a checking account, savings account, investment account)
  • A clear explanation that the money is a gift, not a loan (borrowed funds wouldn't be allowed for down payment gifts)

Remember, gifts are only allowed if they're from family members, not friends. An exception applies if you're engaged and your fiancee is providing the gift.

Documenting the Gift Itself

When writing the down payment gift letter, you'll need to include documentation of where the gift is coming from and your receipt of it.

For instance, the lender may ask to see a bank statement or other form of proof verifying that the donor has the money to gift to you, a copy of a canceled check made out to you, or paperwork showing an electronic transfer between the donor's account and yours.

If the person gifting the funds to you is selling shares of stock or other investments to raise the cash for a down payment, you'll need a statement from their brokerage account showing that transaction. One important caveat to remember, whether you're receiving a check or an electronic transfer from the gifter: deposit this money into a separate bank account apart from your checking or savings.

You don't want to commingle gift funds with any of your other finances. Doing so could complicate the paper trail and cause the lender to reject the gift altogether. 

Are There Tax Implications for Down Payment Gifts? 

Yes and no. As the person receiving a down payment gift, you wouldn't incur any tax liability, regardless of the gift amount. But, the person making the gift to you could trigger the gift tax if the amount exceeds the annual exclusion limit.

For 2018, for instance, parents who are married and file a joint return can gift up to $30,000 per child for a mortgage down payment (or any other purpose), without incurring the gift tax. Another family member, such as grandparent or aunt, could gift up to $15,000 to you before the gift tax applies. 

As you plan your mortgage down payment, it's important to discuss the potential tax implications with the person or persons who are planning to gift the money to you to ensure that they're not at risk of increasing their tax bill.