Keep these guidelines in mind if you are planning to use gift money for your mortgage down payment.
Asking for cash for a down payment as a gift or part of a gift fund — whether it’s for an occasion like your birthday or a milestone like your wedding — is becoming more common. In 2023, 39% of home buyers who financed their home with a mortgage loan used gifts from family and friends as at least one source for their down payment, up nine percentage points from 2018, according to a survey for Zillow’s Consumer Housing Trends Report. And while it’s great to have some help with a major home-buying cost, there are rules around financial gifts that are important to note so you can smoothly navigate the process.
Loan officers need to have a realistic understanding of what you, as a potential home buyer, can afford when you apply for a loan. Gift money can temporarily inflate your bank balance, creating a misleading picture of your finances. Because of this, there are a number of rules around gift funds that you need to know if you’re asking for down payment money from family or friends.
Consider this your go-to guide for handling down payment gifts.
What is a down payment gift?
Down payment money is considered a “gift” when people, usually friends or family, financially contribute money that will help the home buyer pay for a down payment on a home. For example, some home buyers will include a down payment gift fund on their wedding registry. According to research from The Knot, nearly one in five couples who are registered on The Knot are creating down payment funds.
There is generally no limit on how much a borrower is allowed to receive in down payment, Kathy Argento (NMLS# 357025), a mortgage loan officer with Zillow Home Loans, said. With that in mind, it’s helpful to use an Affordability Calculator and talk to your loan officer to determine how much cash you’ll need for a down payment to qualify for a home loan.
Mortgage down payment rules by loan type
Conventional loans backed by Fannie Mae and FHA loans are some of the most common loan types for mortgage down payments and have different rules for down payment gifts.
For Fannie Mae backed loans for a single-family, primary home, a minimum borrower contribution from the borrower’s own funds is not required. This means that all of the money that is needed to make up the down payment can come from a gift.
With Federal Housing Administration (FHA) loans, the borrower is required to provide a minimum cash investment of at least 3.5% for the down payment. That money must be verified by the lender as having come from an approved source. This can include the borrower’s personal cash reserves, cash-in investments, savings bonds or other holdings. Source verification is meant to prevent borrowers from using money that’s obtained from non-collateralized loans like credit card cash advances and payday loans.
For FHA loans, down payments are allowed to come from someone else in the form of a gift as long as it’s a “bona fide gift.” In this case, “All gifts must be a bona fide gift and not a loan that requires repayment,” Steven Park (NMLS# 196947), a mortgage loan officer with Zillow Home Loans, says. This means there must be no expectation or implication of repayment of the funds to the donor by the borrower.
With this type of loan, all gift funds must be properly documented from a gift letter. It’s also worth noting that there are banking and money transfer laws that mortgage companies are required to adhere to. This could include the gift letter, verification of wire transfers, and in some cases, bank statements from the donor.
How to document a down payment gift
While there is no limit to how much money you can accept as a gift for a home down payment, when you’re going through the mortgage loan application process, you’ll need to make sure that you have proper documentation of the gift money you received.
Whether you’ll need documentation is situational based on circumstances like loan type, your monthly income and dollar amount. Typically, any deposits made into a borrower’s bank account that amount to half or more of their monthly income must be documented. Your lender will want to know that you don’t owe someone a large sum of money that you won’t be able to pay back on top of the monthly mortgage payment you’re taking on. Small gift amounts — like $50 or $100 — typically don’t need to be documented in the loan process, but check with your lender to verify if you’re unsure.
This list of Fannie Mae gift rulesfurther outlines some of the details you’ll need to know if you’re applying for a mortgage loan with gift money.
Provide a gift letter
A paper trail that validates your gifts generally includes a gift letter that is written, signed and dated by the gift donor. According to Fannie Mae guidelines, the letter should include:
- the dollar amount of the gift
- the donor’s statement that no repayment is expected
- the donor’s name, address, phone number, and relationship to the borrower
Show a paper trail
If a down payment gift is given ahead of the closing period and deposited into the borrower’s account, a lender will need at least one bank statement from the donor’s account, plus a transaction history that overlaps one day with the last statement provided through the date that the funds cleared.
In addition, the borrower typically needs to provide two months of bank statements, plus a transaction history overlapping one day with the last statement provided through the date that the gift funds clear. The dollar amount is required to match completely. This is the same protocol across the board for FHA, VA and conventional loans.
A tip from Argento if you’re using a conventional loan: “It is often easier to have the donor not give the monetary gift ahead of time, as there may be less paperwork needed from the gifting donor if instead they wire in their gift funds at closing.” If a gift is given later in the process — like wired in at closing, for example — the donor’s bank statement is typically not needed. For FHA loans, however, the donor will need to provide a one-month bank statement that proves they have the funds available.
Give proof of partnership
In some cases, there might be more than a gift letter or bank statement needed, Park says. “There have been instances where we need a receipt of an engagement ring or engagement party pictures to establish the domestic partnership,” he says, adding that this can happen a borrower is receiving money from a domestic partner and they do not share bank accounts.
Do I need to ask my wedding guests who gifted me money for a down payment for a letter?
Remember, generally, all deposits into a borrower’s bank account that are equal to or greater than half of their monthly income are required to be sourced. Cash crowdsourced via a wedding registry is generally in smaller amounts — between $50 and $150 — so gift letters directly from the donors are generally not required as long as the borrowers themselves can prove that the cash came from external donors, according to Argento. That meansyou’ll want to provide documentation to your lender to show you crowdsourced your gift.
A rule of thumb: there must be a paper trail for any money that shows up as a large deposit on the most recent two months of bank statements. In addition, the loan is required to pass all underwriting and gifting guidelines, which varies depending on what type of loan you are applying for.
Who’s eligible to gift you down payment money
Depending on your loan type, there may be limits on who is eligible to gift you down payment money.
For FHA loans, a cash gift for a down payment is acceptable if the donor is the borrower’s relative, the borrower’s employer or labor union, a close friend with a clearly defined and documented interest in the borrower, a charitable organization or a governmental agency or public entity that has a program providing home ownership assistance for low and moderate-income families or first-time homebuyers.
With Fannie Mae-backed loans, a gift can be provided by a relative — which is defined as the borrower’s spouse, child or other dependent — or any other individual who is related to the borrower by blood, marriage, adoption or legal guardianship. Gifts can also come from “a non-relative that shares a familial relationship with the borrower defined as a domestic partner (or relative of the domestic partner), individual engaged to marry the borrower, former relative or godparent.”
Donations for down payments can not come from people who are directly affiliated with the homebuying transaction. This might include builders, developers or real estate agents.