For many prospective homeowners, receiving a monetary gift from family or friends can be a life-changing step in making homeownership a reality. However, understanding how much money can be gifted for a down payment involves more than just accepting a check. There are specific guidelines and regulations that both the giver and receiver must adhere to ensure that the process is both legal and beneficial. These rules can vary depending on the type of mortgage, the lender’s requirements and tax implications.
If you want to buy a home, a financial advisor can work with you to create a plan to save for a down payment.
How a Gift for a Down Payment Works
A gift for a down payment can be a valuable solution, allowing family members or close friends to assist financially. This type of gift can significantly ease the financial burden, making homeownership more accessible. However, you should be mindful of the rules and regulations surrounding these gifts for a smooth transaction.
To use a gift for a down payment, lenders typically require a gift letter. This document confirms that the money is indeed a gift and not a loan that needs to be repaid. The letter should include the donor’s name, address, and relationship to the recipient, as well as the amount of the gift and a statement that repayment is not expected. Providing this letter helps lenders verify the legitimacy of the funds, ensuring compliance with mortgage guidelines.
Different lenders have varying guidelines regarding down payment gifts. Some may require a certain percentage of the down payment to come from the buyer’s own funds, while others may allow the entire amount to be gifted. Buyers should check with their lender to understand specific requirements and restrictions. Additionally, certain loan programs, such as FHA loans, have their own rules about down payment gifts, which should be reviewed carefully.
Gift Rules By Loan Type
There are rules to how much someone can gift someone else in a year without having to report it to the IRS as part of the gift and estate tax. That limit is $18,000 in 2024 and set to increase to $19,000 in 2025. That limit is set per person so the amount per couple doubles ($36,000 in 2024 and $38,000 in 2025). However, there are also rules for using gift money for down payments, depending on the type of loan that you're receiving for your mortgage. Here are the rules for four popular real estate loan programs:
- Conventional loans. Typically, these loans allow the entire down payment to be gifted, provided the donor is a relative, spouse, domestic partner, or godparent. Lenders usually require a gift letter, which should clearly state that the funds are a gift and not a loan. This letter must include the donor’s information, the relationship to the borrower, and the amount of the gift. It’s important to note that while conventional loans are flexible with gift funds, the borrower must still meet credit and income requirements.
- FHA loans. These loans allow the entire down payment to be gifted, which can be a huge relief for those who may not have substantial savings. The gift can come from a family member, close friend, an employer, and even a labor union, charitable organization or a government agency. Like conventional loans, FHA loans require a gift letter to verify that the funds are not expected to be repaid. This flexibility makes FHA loans an attractive option for many buyers who need financial assistance for their down payment.
- VA loans. VA loans are available to veterans and active-duty service members, and offer unique benefits, including the possibility of no down payment. However, if a down payment is made, it can be entirely gifted. The donor must be a relative or someone with a close personal relationship with the borrower. VA loans also require a gift letter to ensure the funds are a genuine gift. This option provides veterans with additional financial flexibility, making homeownership more accessible for those who have served in the military.
- USDA loans. These loans are designed for rural and suburban homebuyers who meet specific income requirements. They often require no down payment, but if a down payment is made, it can be fully gifted. The gift cannot come from someone with an interest in the sale, like the realtor or the builder. As with other loan types, a gift letter is necessary to confirm that the funds are not a loan. USDA loans offer an excellent opportunity for eligible buyers to secure a home with minimal upfront costs.
How to Document Gift Money for Your Lender
One of the primary documents you’ll need is a gift letter. This letter serves as a formal declaration that the money you’re receiving is indeed a gift and not a loan that needs to be repaid. The letter should include the donor’s name, address, and relationship to you, as well as the exact amount of the gift. Additionally, it should clearly state that the money is a gift with no expectation of repayment. Both you and the donor must sign the letter to validate its authenticity.
Lenders will also require proof of the donor’s ability to give the gift. This typically involves providing bank statements or other financial documents that show the donor has sufficient funds to cover the gift amount. This step is important because lenders need to confirm that the gift money is legitimate and not borrowed from another source, which could affect your financial stability.
Maintaining a clear paper trail of the gift money transaction is essential. This includes keeping copies of the gift letter, bank statements and any correspondence related to the gift. Having these documents organized and readily accessible can streamline the mortgage approval process and provide peace of mind for both you and your lender.
Bottom Line
Gifted funds can help make saving for a down payment easier, but it's important to follow the guidelines and rules. For conventional loans, lenders usually allow the entire down payment to be gifted if it comes from a relative or close friend and proper documentation is provided. Following these rules helps avoid tax issues and keeps the process smooth. Using gifted money effectively can make homeownership more achievable while supporting financial stability.
Homebuying Tips
- A financial advisor can clarify the rules for gifted funds and help incorporate them into your financial plan and homeownership goals. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to figure out how much you can spend on a home, SmartAsset's affordability calculator can help you estimate how much house you can afford based on several key inputs.
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