How to Document Mortgage Down-Payment Gifts

Mortgage down-payment gifts can make homebuying more affordable

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 homebuyers face. 

According to a National Association of Realtors survey, 26% of first-time buyers and 7% of repeat buyers cited saving a down payment as the most difficult part of the homebuying process. 

Asking family members to contribute to your down payment is one potential workaround you might consider, particularly if an economic downturn makes saving more difficult. There's a caveat, however, for gifting money to family members to buy a home: Funds must be properly documented with a down-payment gift letter. 

Down-Payment Gift Guidelines

Before accepting a mortgage down-payment gift, there are 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
  • Mortgage down-payment gifts must be a gift; they can't be treated as loans
  • They 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. For instance, 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
  • Child or other dependents
  • Fiancee or domestic partner
  • Anyone else related to you by blood, marriage, adoption, or legal guardianship

If you're buying a one- to four-unit home to use as a principal residence or a second home and the loan-to-value ratio is 80% or less, the entire amount of your down payment can come from gifted funds. You must contribute at least 5% of the down payment from your own funds when buying a two- to four-unit home or second home with an LTV greater than 80% for Fannie Mae mortgages. Freddie Mac mortgages require at least 5% from the borrower when the loan is secured by a second home and 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. Per 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

To qualify as a gift, the money given to you by one of the above sources must not have a repayment requirement.

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. However, you could 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. You could bring gifted down-payment funds to the closing table to reduce the amount you need to finance, though. 

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

Down-Payment Gift Letter

If you're ready to purchase a home using gifted funds, you'll need a down-payment gift letter. For example, your gift 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 (i.e. a checking account, savings account, investment account)
  • A clear explanation that the money is a gift, not a loan (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 and include the date that the gift was made to you or will be made if funds haven't been transferred yet. 

Ask your lender if they have a specific down-payment gift letter template you can use.

Other Documentation You Need

When documenting a down-payment gift it's important to have a paper trail showing the movement of funds from the donor's account to yours. For conventional loans, Fannie Mae lists as acceptable the following four methods of documentation:

  • 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, or
  • A settlement statement showing receipt of the donor’s check

If down-payment gifts aren't transferred before settlement, the lender must verify that the person gifting funds gave the closing agent a certified check, cashier's check, or other official checks. 

Tax Implications for Gifting Money to Family Members

As the person receiving a down-payment gift, you won't incur any tax liability, regardless of the gift amount. However, the person 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 file a joint return can gift up to $30,000 per child for a mortgage down payment (or any other purpose), without incurring gift tax reporting requirements. The gift tax exclusion limit for single filers is $15,000.

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 mortgage and down payment, consider other possibilities for raising the money you need to buy a home.

Among other avenues for financing, consider whether you qualify for a no down payment VA or USDA loan. Or weigh the pros and cons of getting an FHA loan with just 3.5% down. 

You could also extend your timeline for buying and work on saving money. Or you might decide to sell things you own or start a side hustle or business to create additional cash flow you can save.

Down payment assistance programs are another option. These programs can provide grants and cash assistance to help cover down payments and, in some cases, closing costs, for eligible homebuyers. A quick search online can help with finding down payment assistance 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.