Saving up to make a down payment can be difficult — especially when you have plenty of expenses and bills to pay. You can borrow money or tap into your retirement savings to make a down payment, but those options come with their own risks.
Another option is to use gift money from family or close friends to help you make a down payment. However, there are certain rules and restrictions for using gift money this way. Here’s what you need to know.
Types of Down Payment Gifts
The most common form of a down payment gift would be cash — whether it’s deposited physically or electronically. However, you can also receive a gift of home equity. That’s when a family member sells their home to you for a price that is well below its appraised fair market value. This way, if you don’t have enough money to make a down payment, you’ll receive the difference in equity.
How Can You Use Gift Money?
If the home you are buying is going to be your primary residence, then you can use gift money to cover a portion of your down payment or serve as your entire down payment. If you have enough gift money or a down payment isn’t required, you can also use the funds to cover a portion of your closing costs.
Who Can You Take Gift Money From?
In order to use money that you’ve been gifted to make a down payment, lenders typically require that it come from someone close to you. The exact requirements will vary based on your lender and loan type. You’ll be required to disclose your relationship to the donor and provide a gift letter with more information about the gift.
What Are the Limits on Gift Money?
There typically aren’t limits on the amount of money you’re able to be gifted. However, your lender may require you to use some of your own money to cover a portion of the down payment. There are also limits on who you can receive gift money from that will vary depending on what type of loan you have.
Limits by loan type
Here’s a look at the different limits on gift money based on your loan type.
Conventional loans are mortgages that aren’t insured by any government agency. Fannie Mae and Freddie Mac are two government-sponsored enterprises that guarantee conventional mortgages. You may use gift money for a down payment on a conventional loan as long as it comes from a family member. According to Fannie Mae and Freddie Mac, that includes the following:
- Child (including foster children).
- Sibling (including stepsiblings and foster siblings).
- Aunt and uncle (including great, step, and foster aunt or uncle).
- Grandparent (including great, step, and foster grandparents).
- Niece or nephew (including stepniece or stepnephew).
- Cousins (including stepcousins).
- In-laws (including parents, aunts, uncles, and siblings-in-law).
- Fiance or fiancee.
Loans backed by the Federal Housing Administration are intended for low- to moderate-income homebuyers. To use gift money as part of a down payment on an FHA loan, it must come from family or another specified donor. Nieces, nephews, and cousins are not eligible donors. The FHA does, however, permit gifts from employers, labor unions, and government agencies.
Loans offered by Veterans Affairs are available to eligible military service members, veterans, and their surviving spouses. The only donor restriction for VA loans is that the money cannot come from an interested party. That means you can’t use gift money you got from the seller, your real estate agent, or a developer.
Loans offered by the Department of Agriculture help low- and moderate-income buyers afford a home in eligible rural areas. As with VA loans, a down payment is not required and gift money cannot be used to cover closing costs if it has come from an interested party.
Tax Implications of Gift Money
A donor can gift up to $17,000 without having to report it on their taxes. After that, they have to pay a gift tax. The IRS sets the annual exclusion limit each year. When the donor files their gift tax return, it will also count toward their lifetime gift tax exclusion — which indicates the amount of money they can gift over the course of your life.
What Is a Gift Letter?
If you’ve received gift money for your down payment, then you’ll need a gift letter for your lender. A gift letter is a letter from the donor that states that the money is a gift and not a loan that you need to repay.
A gift letter needs to include the following:
- The donor’s name, address, and phone number.
- Disclosure of the relationship between you and the lender.
- A statement from the donor that the money does not need to be repaid.
- The dollar amount of the gift money.
- The date the funds were received.
- The donor’s banking information.
- Signatures of the donor and recipient.
- The address of the property that’s being purchased.
Your lender may also need proof that the funds have been received, which you and the donor can provide through bank statements or deposit slips.
Your lender may require recent documentation of your assets to determine your eligibility. You should expect to be asked to provide a 60-day history of your assets along with your gift money letter.
Sample gift letter
Your lender may give you a gift letter template or at least tell you the requirements. Here’s a look at what a sample gift letter might look like:
To: [Mortgage lender’s name and address]
I/we [Name of person or people giving the gift] intend to make a gift of $[amount] to [name of person or people receiving the gift]. Our relationship to the recipient is [explanation of the donor’s connection to the recipient].
The gift is to be applied to the purchase of the home or property located at [address of home]. We have given this gift on [date].
No repayment is expected or implied in this gift, either in the form of cash or by future services, and no lien will be filed against the property.
The source of the gift is [description of where the gift is coming from].
[Signature of donors]
[Donor’s address and contact information]
Pros and Cons of Down Payment Gift Money
Some of the advantages of down payment gift money include:
- You get the money for a down payment and become a homeowner that much sooner.
- You can make a larger down payment than you otherwise would have.
- You don’t have to repay the money — in fact, you’re not allowed to.
- You can begin building equity sooner.
- You may be able to buy a more expensive home.
- You may be able to take out a smaller loan.
Some of the disadvantages of down payment gift money include:
- It can complicate your relationship with that person.
- Not everyone has generous, well-financed relatives.