When buying a home, your down payment is most likely the largest upfront expense. A lot of future first-time homebuyers can reasonably afford monthly mortgage payments, however, the initial cost of purchasing a home can be a deal-breaker to pay on their own.

Fortunately, if you haven’t saved enough of your own money for a home purchase, we allow borrowers to purchase a home with gifted funds from a generous donor.

Let’s take a look at how to use gifted money for your mortgage down payment:

Types Of Down Payment Gifts

Typically, there are two types of gifts that your relatives or donors (non-relative contacts, limited to specific loan products) can provide: a cash down payment gift or, in the event a relative is selling the property to you, or a gift of equity. In each case, the funds may be used towards the home down payment, closing costs, and prepaid interest points.

Depending on the type of loan, you may also be able to use the gift to pay off debts so you can qualify for your mortgage. In certain cases, a borrower must have a certain percentage of payment coming from their own funds:

• Conventional and FHA loans do not require any monetary contribution from a borrower when purchasing a single unit primary residence.
• A lot of Jumbo and Non-QM loan products do not require a borrower contribution if the down payment exceeds or is equal to 20%.  If the down payment is less that 20%, a 5% borrower contribution is typically required.
• Conventional loans require a 5% borrower contribution when the property is 2-4 units or a second home with a down payment less than 20%.

What is a gift letter?

A gift letter is a statement that ensures the money that came into your account is a gift and doesn’t need to be paid back. It should be signed by the gift recipient and donor and include the following details:

• Full name(s) and contact information
• Their relationship to the borrower
• The address of the home the borrower is planning to buy
• The exact amount of the gift
• Explanation of where the money is coming from
• The date they will transfer funds
• A statement that reiterates that the money is a gift and doesn’t have to be repaid

* Additional information can be requested depending on the type of home loan you apply for, and how much money you received.

When can you use gift funds?

There are no limits on the amount someone can give you for a mortgage down payment, closing costs, or cash reserves. However, depending on the loan and property type, you may be required to contribute a certain percentage of the down payment from your own funds.

Gift funds for a mortgage can be used to obtain a mortgage for a primary residence or a second home. Investment properties are not eligible to receive gift funds. If you’re not quite sure which type of property applies to you, you should check with your mortgage company for up-to-date guidelines.

Who can give gift funds?

Depending on the type of loan you’re getting, there are different guidelines regarding who may give a down payment gift to you. Let’s briefly go over those.

Conventional Loans

If you’re getting a conventional loan through Fannie Mae or Freddie Mac, the gift has to come from a family member. For the purposes of your mortgage, family is defined by Fannie Mae as follows:

• a relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or
• a fiancé, fiancée, or domestic partner.

The donor may not be, or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction.

FHA Loans

FHA loans have nearly identical guidelines for establishing who is an acceptable gift donor, with some minor variations.

While cousins, nieces and nephews are not specifically mentioned under normal family member guidelines, the FHA does allow gifts to come from close friends who have a clear interest in your life. This can include extended family – i.e. cousins, nieces, nephews, and even former spouses.

In addition to the close friends, the FHA also allows gifts to come from the following:

• Employer
• Labor union
• Charitable organization

You can also receive funds from a government agency or public entity that provides homeownership assistance to low-to-moderate-income or first-time home buyers.

USDA And VA Loans

The USDA and VA don’t place many limits on who can give a gift. The only requirement is that it can’t be an interested party, in other words, someone who is involved in the transaction directly or indirectly. This includes, but isn’t limited to:

• Seller
• Builder
• Developer
• Real estate agent

The Bottom Line

When you speak with your lender about which loan program is best for you, be sure to let them know upfront that you plan on using a gift for the down payment. Some loan programs have strict guidelines about how much gift money you can use for a down payment and who can gift you the money.