How to Document Mortgage Down Payment Gifts

Mortgage down payment gifts can make homebuying more affordable

A young couple meeting with other people, representing a headline and text that reads: Down-payment gift guidelines - The amount of down-payment funds that can be gifted depends on the type of mortgage loan, a credit score of 580 or above means you're eligible for an FHA loan with a 3.5% down payment, a credit score of below 580 means you'll need to put at least 10% down, if you decide to put down 20% or more on an FHA loan, then the entire down payment can be gifted, a credit score between 580 and 619 means that 3.5% of the down payment must come from your own house

The Balance / Jiaqi Zhou

Saving enough for a down payment is one of the biggest challenges that homebuyers face. Asking family members to contribute to your down payment is one potential workaround you might think about, particularly if an economic downturn makes saving more difficult. But there's a caveat for gifting money to family members to buy a home: Funds must be properly documented with a down payment gift letter.

Key Takeaways

  • The amount or percentage of gifted money you can put toward a down payment can vary by loan type.
  • Fannie Mae and Freddie Mac restrict the practice to money received from relatives, domestic partners, or fiancés.
  • The FHA will allow you to accept money from friends, charitable organizations, and down payment assistance programs.
  • The funds must clearly be a gift. There can be no expectation of repayment. The transaction must be documented.

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 spouse
  • A child or other dependents
  • A fiancé or domestic partner
  • Anyone 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 members
  • Close friends
  • Your employer or labor union
  • Charitable organizations
  • Down 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.

While USDA and VA loans don't require a down payment, you must meet minimum credit score criteria to qualify.

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 name
  • 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 (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.

Ask your lender whether it has a specific down payment gift letter template you can use.

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 slip
  • A copy of the donor's withdrawal slip and the borrower's deposit slip
  • A copy of the donor's check to the closing agent
  • A 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.

Weigh the pros and cons of accepting down payment gifts to make sure it's the best option when buying a home.

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.

Down payment assistance programs may require you to live in the home for a certain number of years to qualify for help.

Frequently Asked Questions (FAQs)

How are you allowed to receive money from parents for a down payment?

The source and amount of the gift matter more than the method of transferring funds. In terms of how you receive the gift, all that matters is that you have documentation to prove exactly where the funds came from. It could be a check, a copy of the withdrawal slip showing how much cash your parents withdrew, or anything along those lines to verify the amount and source of the funds.

How much is the gift tax?

The top tax rate for the gift tax is 40% as of 2021. But that only applies to gifts that exceed the tax-free limit by $1 million or more. The first $10,000 you give above the tax-free limit is taxed at 18%. Check the Internal Revenue Service's instructions for Form 709 for more information about how gifts can be taxed.

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