Can You Use Gift Money for Your Mortgage Down Payment?
Has a friend or family member gifted you money for a house you plan on purchasing? Chances are you’re already planning to use it for your down payment. Not so fast! There are rigid limitations on approved payment methods and sources for down payments.
If you’ve been gifted money and are wondering if you can use it towards a down payment, we encourage you to read this article until the end. We’re going to take a deep dive into this topic and address all the questions you have. Let’s get started!
What Is A Down Payment Gift?
Down payment gifts are monetary gifts given to prospective home buyers for their down payment.
The main stipulation of a down payment gift is that it must be a gift. Any expectation of repayment would make the gifted money a loan, and lenders have different requirements for loans. Your lender wants to ensure you can afford to repay your mortgage, and taking on an additional loan would impact your debt-to-income ratio.
Another thing to keep in mind is that many lenders have strict requirements on who can provide a down payment gift. This protects the lender from fraudulent applications.
Mortgage Down Payment Gift Rules
Many people are surprised to discover how restrictive down payment gifts can be. Luckily, you can educate yourself on the rules governing these gifts within a couple of minutes. Below, we’ll look into the most relevant mortgage down payment gift rules.
How Much Can Be Gifted for A Mortgage Down Payment?
The good news is that, for many home loan types, there’s no restriction on how much a down payment gift can be.
In some cases, the gift can cover the entire down payment! But this benefit is almost always limited to a loan for a primary residence. If you plan on using the gift for an investment property or a secondary home, you’ll typically have to pay at least 5% of the down payment yourself.
Who Can Give You A Down Payment Gift?
Your lender has to make sure that the money is actually a gift, with no expectation of repayment. To do that, many have limitations on who can give you a down payment gift. These requirements vary based on the type of loan, which we’ll break down below.
- Conventional loans
- By blood
- Legal guardianship
- Domestic partners
- USDA loans
- Any non-interested party
- VA loans
- Any non-interested party
- FHA loans
- Close friends
- Members of your immediate family
- Labor unions
- Charitable organizations
Note: An interested person is anyone who is involved in the purchase of a home. That includes the seller, builder, developer, real estate agents, or anyone else who stands to benefit from the sale. USDA and VA loans allow anyone who isn’t one of these interested parties to give you a down payment gift.
Documentation Requirements for Mortgage Down Payment Gifts
Before your mortgage lender accepts gift money, you’ll likely need to provide a down payment gift letter. When you speak with your lender, ask them for a copy of their specific gift letter template. The information requirements for down payment gift letters vary depending on the lender, but they typically include:
- Your full name
- The name, address, and phone number of the person giving the gift.
- The amount that’s been gifted.
- The date that the donor transferred the money.
- The address to the house you plan on buying.
- The nature of the relationship between the donor and the borrower.
- The nature of the relationship between the donor and the buyer.
- A statement from the donor that they do not expect repayment.
- The signature of both the donor and the gift recipient.
When you receive money for your down payment, the most important thing to remember is that you’ll need a clear, traceable paper trail that details the movement of the funds from the donor to the recipient. Document the transfer at every step so you’ll be prepared for any questions that arise. Some of the things to keep track of are:
- Bank statements
- Evidence of the wire transfer
- A copy of the check and your deposit slip
- A copy of the settlement statement showing how, when, and where you deposited the gift.
Risks of Signing A Mortgage Down Payment Gift Letter
As long as your gift payment is from an allowed source, adequately taxed, and correctly labeled, signing a mortgage down payment gift letter is relatively risk-free. However, labeling a personal loan as a gift can result in accusations of mortgage or bank fraud for both the borrower and lender.
Timing for Down Payment Gift
Luckily, there isn’t a required time frame for when you can receive or apply a gift towards your down payment. However, it's usually better to use it as soon as possible. Many mortgage lenders review a 60 to 90-day history of your assets. You want to be able to provide them with accurate documentation so that you can put the gift towards your down payment without issues.
If the gift has been in your account for an extended period, you may occasionally have to provide extra documentation proving its nature. Alternatively, the mortgage lender may look at money acquired over two months ago as seasoned funds and readily accept it. Seasoned funds are funds that have been in your account for an extended period of time (2 to 3 months or longer). Lenders usually won’t question this money since it’s been sitting for so long, though some lenders may.
Dos and Don’ts of Mortgage Down Payment Gifts
Now that you know the ins and outs of using gifted money towards your down payment, we’d like to review a list of best practices. Keep these do’s and don’ts in mind to ensure that things go smoothly.
Want to use gifted money as part of your down payment? These dos will make the process easier and prevent costly issues.
- Do keep track of the money as it’s changing hands.
- Do check your loan requirements to make sure your gift is coming from an approved source.
- Do double-check to make sure your gift is allowed if you’re purchasing a secondary or investment property.
- Do know the exact amount that’s been gifted for applicable gift tax reporting.
- Do disclose monetary down payment gifts, regardless of the amount.
- Do familiarize yourself with the maximum tax-free gift exclusion, as it changes yearly. Tax implications can affect whether accepting the gift money would be a good financial decision.
- Do ask your lender for a gift letter template so you can provide the exact information they need.
Now that you know what to do, we’d like to go over some things you should avoid to protect yourself against fraud, dismissals, or difficulty securing your mortgage.
- Don’t label the money as a gift if there’s an expectation of repayment, or you and the donor could be held responsible for mortgage or bank fraud.
- Don’t fail to disclose money that you’re receiving as a down payment gift.
- Don’t assume your mortgage provider accepts gifts, as some may not.
- Don’t forget to look into federal gift taxes.
- Don’t forget to check the qualifications for your specific loan type.
Although you can use a gift towards your down payment in some cases, the rules regarding who can gift money can be strict. That said, accepting gift money is an excellent way to secure funds for the purchase of a new home. We hope that this article has answered all of your questions and helped explain the ins and outs of using a gift for a down payment. Good luck!