Using Gift Funds for a Down Payment: Rules and Requirements

Saving for a down payment is one of the biggest obstacles to homeownership—especially with median home prices in many markets exceeding $500,000. If you're fortunate enough to have family members willing to help, gift funds can be a legitimate way to bridge the gap.

But lenders have strict rules about gift money. You can't just have Mom deposit $20,000 into your account and expect everything to be fine. Documentation is critical, timing matters, and the source of the gift is scrutinized carefully.

Here's everything you need to know about using gift funds for a down payment.

What Are Gift Funds?

Gift funds are money given to you by an acceptable donor (typically a family member) to help with:

• Down payment
• Closing costs
• Reserves (money left over after closing)

The critical requirement: It must be a true gift, not a loan. You cannot be expected to repay the money, and there can be no arrangement (written or verbal) for repayment.

Who Can Give You Gift Funds?

Lenders restrict gift donors to specific relationships to prevent fraud and hidden loans.

Conventional Loans (Fannie Mae/Freddie Mac)

Acceptable donors:

• Family members: Spouse, child, parent, grandparent, sibling, aunt, uncle, niece, nephew
• Domestic partner or fiancé/fiancée (with documentation of relationship)
• Legal guardian

Also acceptable (with restrictions):

• Employer (must be documented as an employment benefit, not tied to mortgage)
• Charitable organization (with clear documentation)
• Government agency or entity

NOT acceptable:

• Friends
• Business associates
• Anyone with an interest in the sale (seller, real estate agent, builder)

FHA Loans

FHA is more flexible with gift sources.

Acceptable donors:

• Family members (same as conventional, plus cousins)
• Employer
• Labor union
• Close friend with documented relationship
• Charitable organization
• Government assistance program

The catch: While FHA allows friends, many lenders overlay their own restrictions and still require family relationship.

VA Loans

Acceptable donors:

• Anyone (no relationship requirement)
• This is the most flexible

However, the lender must verify:

• The donor's identity
• That it's truly a gift, not a loan
• Source of the donor's funds (in some cases)

USDA Loans

Acceptable donors:

• Family members
• Employer
• Charitable organization
• Government entity

Similar to conventional with slightly more flexibility for organizational gifts.

How Much Can Be Gifted?

This varies by loan type and down payment percentage:

Conventional Loans

Primary residence:

• Less than 20% down: Gift can cover up to 100% of down payment and closing costs, BUT you must contribute at least 5% from your own funds if putting down less than 20%
• 20% or more down: Gift can be 100% of down payment and closing costs

Second home:

• Must put down at least 10% from your own funds
• Gift can cover the rest

Investment property:

• No gifts allowed for down payment
• Must use your own funds

FHA Loans

• 100% of down payment can be gifted
• 100% of closing costs can be gifted
• You are not required to contribute any of your own funds

This makes FHA very attractive for first-time buyers with family support.

VA Loans

• 100% of closing costs can be gifted (even though VA loans require $0 down)
• Helpful for funding costs and reserves

USDA Loans

• 100% of closing costs can be gifted (USDA also requires $0 down)

Required Documentation

Lenders require a paper trail proving the gift is legitimate. Missing or incomplete documentation can delay closing or kill the deal entirely.

1. Gift Letter (Required for All)

This is a signed letter from the donor stating:

Must include:

• Donor's name, address, and phone number
• Donor's relationship to you
• Dollar amount of the gift
• Address of the property being purchased
• Statement that no repayment is expected
• Donor's signature and date

Sample gift letter template:

I/We, [Donor Name], hereby certify that I/we have gifted 
[Borrower Name] the sum of $[Amount] to be applied toward 
the purchase of property located at [Property Address].

This is a bona fide gift, and there is no obligation, 
implied or otherwise, for repayment.

Relationship to borrower: [Mother/Father/etc.]

Donor signature: _________________ Date: _________
Donor address: _____________________________________
Donor phone: ______________________________________

Many lenders provide their own template—use it if they do.

2. Proof of Donor's Ability to Give

Lenders need to verify the donor actually has the money.

Required documentation:

• Bank statement showing the gift amount in the donor's account
• Usually from the last 30-60 days
• Must clearly show sufficient funds before transfer

Example: If the gift is $25,000, the donor's bank statement must show at least $25,000 (ideally more) in their account.

3. Proof of Transfer

Lenders need to see the money actually move from the donor to you (or directly to closing).

Acceptable proof:

• Copy of canceled check from donor
• Wire transfer confirmation
• Bank statement showing the deposit into your account
• Settlement statement if donor brings funds directly to closing

Most common method: Wire transfer, because it's fast and leaves a clear paper trail.

4. Your Bank Statement Showing Receipt

If the gift goes to your account first (rather than directly to closing), you need to show:

• Bank statement showing the deposit
• Clear notation that it's from the donor

Important: This must align with the gift letter amount and donor's transfer documentation.

Timing: When the Gift Money Needs to Move

Option 1: Transfer Before You Apply (Easiest)

Timeline: Gift deposited 60+ days before applying

Benefit: Once the money has been in your account for 60 days, it's "seasoned" and no longer requires gift documentation in most cases

Process:

1. Donor transfers money to your account
2. Wait 60+ days
3. Apply for mortgage
4. Provide 2 months of bank statements showing the money

Best for: If you're planning ahead and not in a rush

Option 2: Transfer During the Mortgage Process (Most Common)

Timeline: Gift deposited after pre-approval but before closing

Process:

1. Get pre-approved
2. Find a house
3. Go under contract
4. Request gift from donor
5. Donor transfers money to your account
6. Provide all gift documentation to lender
7. Money shows on settlement statement as your funds

Best for: Most buyers using gift funds

Important: Lender must verify the funds before closing, so don't wait until the last minute.

Option 3: Donor Brings Funds Directly to Closing (Cleanest)

Timeline: Donor wires money directly to the title company at closing

Process:

1. Complete gift letter in advance
2. Provide donor's bank statement showing funds
3. Donor wires gift amount directly to title company
4. Gift shown separately on settlement statement

Benefits:

• Cleanest paper trail
• Fewer bank statements needed
• No commingling of funds

Potential issue: Some title companies or lenders prefer funds to come from the borrower's account, so verify this is acceptable beforehand.

Source of Funds: The Money Behind the Gift

Here's where it gets tricky. Lenders don't just verify the donor has the money—they also want to know where the donor got it.

Acceptable Sources

Funds already in the donor's account:

• Savings accumulated over time (ideal)
• Investment account liquidation (stocks, bonds)
• Retirement account withdrawal (401k, IRA)

Questionable sources (require additional documentation):

• Recent deposit into donor's account: If your mom suddenly has $30,000 deposited right before gifting it to you, lenders will question where SHE got it
• Loan proceeds: If your parents took out a loan to gift you money, it may be considered an indirect loan to you (not acceptable)
• Another gift: If your grandmother gifted money to your mother, who then gifted it to you, lenders may require documentation going back to the original source

Not acceptable:

• Cash (cannot be verified)
• Unsecured personal loans to the donor
• Anyone with a financial interest in the transaction giving money to the "donor" to pass to you

The Paper Trail Can Go Back Multiple Steps

Example scenario that creates problems:

1. You need $40,000 for a down payment
2. Your parents agree to gift it to you
3. Your parents don't have $40,000 in liquid cash
4. Your grandmother gives your parents $40,000
5. Your parents give it to you

Lender's concern: Is this really a gift from your parents, or is it a loan from your grandmother that your parents are facilitating?

Solution:

• Have your grandmother gift directly to you (if she's an acceptable donor)
• Provide documentation of the entire chain (gift letter from grandmother to parents, then parents to you)
• Wait for funds to "season" in your parents' account before they gift to you

Common Mistakes That Delay Closing

1. Depositing Cash

The problem: If your dad gives you $15,000 in cash and you deposit it, lenders cannot verify the source.

The solution: The gift must be transferred electronically (wire, check, or bank transfer).

2. Gift Letter Doesn't Match Transfer Amount

Example:

• Gift letter says $25,000
• Wire transfer is for $27,500

Even small discrepancies raise red flags and require explanation.

Solution: Be precise. Decide the exact amount, write the gift letter, then transfer that exact amount.

3. Missing Donor's Bank Statement

The problem: You provide a gift letter and proof of deposit, but don't include the donor's bank statement showing they had the funds.

Solution: Get the donor's bank statement at the same time you get the gift letter.

4. Commingling Funds

The problem: Your sister gifts you $20,000, which you deposit into an account that has $5,000 already. You also deposited your $3,000 paycheck and paid bills. Now it's unclear which money came from where.

Solution:

• Open a separate savings account just for the gift
• Deposit gift funds there
• Don't touch them until closing
• Provide clear statements showing gift deposit and no withdrawals

5. Last-Minute Gifts

The problem: You're 5 days from closing and suddenly receive a $10,000 gift.

Lender's reaction: Need to verify, source, document—this could delay closing.

Solution: Get gifts deposited at least 2-3 weeks before closing to allow time for documentation and verification.

6. Undisclosed Gifts During Underwriting

The problem: You didn't mention the gift when applying, then a large deposit appears on your bank statements during underwriting.

Result: Underwriters will stop the process until the deposit is fully explained and documented.

Solution: Disclose gifts upfront to your loan officer. Don't surprise the underwriter.

Tax Implications

For You (The Recipient)

Good news: Gifts are not taxable income to the recipient.

You don't pay taxes on gift money and you don't report it on your tax return.

For the Donor

Federal gift tax rules (2026):

• Annual exclusion: $18,000 per person per year ($19,000 for 2024, indexed for inflation)
• Lifetime exemption: $13.61 million per person (as of 2024, indexed annually)

What this means:

• Your parents can each gift you $18,000/year without any reporting requirement (total $36,000 from both parents)
• If they gift more, they must file Form 709 (gift tax return), but no tax is owed unless they've exceeded their lifetime exemption
• In practice, most people never pay gift tax due to the high lifetime exemption

For married couples buying together:

• Each parent can gift $18,000 to each spouse
• Total potential annual gift without reporting: $72,000 (Mom to you $18k, Mom to spouse $18k, Dad to you $18k, Dad to spouse $18k)

If the gift exceeds these amounts: The donor may need to file Form 709, but this is informational—actual gift tax is rare unless the donor has previously given away millions.

Recommendation: Consult a tax professional if gifts exceed $18,000 per person per year.

Special Situations

Equity Gifts (Seller Gifts to Related Buyer)

If you're buying a house from a family member and they're "gifting" you equity (selling below market value), this is allowed but heavily regulated.

Example:

• House worth $400,000
• Parent sells to you for $320,000
• The $80,000 "discount" is considered equity gift

Requirements:

• Appraisal confirming market value
• Gift letter explaining the equity gift
• LTV calculated based on sales price, not appraised value

Caution: This can complicate the transaction. Work with an experienced lender.

Gift of Equity from Non-Relatives

Generally not allowed. The seller must be a family member for gift of equity to work.

Employer Assistance Programs

Some employers offer down payment assistance as a benefit.

Requirements:

• Must be a formal program available to all eligible employees
• Cannot be tied specifically to one person or the home purchase
• Must be documented in company policy

Alternatives If Gifts Aren't Available

If you can't get gift funds:

1. Down Payment Assistance Programs (DPA)

• Many states and localities offer grants or forgivable loans
• Income limits apply
• See our guide: Down Payment Assistance Programs in 2026

2. IRA Withdrawal

• First-time homebuyers can withdraw up to $10,000 from IRA penalty-free
• Still owe income tax on the withdrawal
• Must be used within 120 days

3. 401(k) Loan

• Borrow from your own retirement account
• Repay yourself with interest
• Doesn't affect DTI if structured correctly
• Risk: Must repay if you leave your job

4. Savings Plans with Lower Down Payment

• FHA: 3.5% down
• Conventional: 3% down (HomeReady/Home Possible)
• VA/USDA: $0 down (if eligible)

The Bottom Line

Gift funds are a legitimate and common way to help buyers achieve homeownership. Lenders accept them readily—if properly documented.

Keys to success:

1. Use acceptable donors (family members for most loan types)
2. Get a complete gift letter with all required information
3. Document the entire paper trail (donor's funds, transfer, receipt)
4. Time the gift appropriately (ideally 2-3 weeks before closing or 60+ days before applying)
5. Disclose gifts upfront to your lender

With the right preparation and documentation, gift funds can turn the dream of homeownership into reality—even when saving the full down payment on your own would take years.

If you're receiving a gift, start gathering documentation early, communicate clearly with your lender, and follow the rules precisely. The last thing you want is a gift to derail your closing because of missing paperwork.