Saving for a home down payment is often the biggest challenge for many homebuyers. Mortgage gift funds offer a way for family members or approved donors to provide financial help without creating a loan. Lenders require a clear paper trail to ensure the gifted money isn’t secretly borrowed.
A crucial part of using mortgage gift funds is the gift letter, a signed document that states the funds are a true gift with no repayment expected. The letter must include the donor’s details, the amount gifted, the property’s address, and a clear statement that it’s a gift. This safeguards both buyers and lenders during mortgage approval.
Alongside the gift letter, lenders require documentation showing the transfer of funds, such as bank statements from the donor and recipient and proof of the electronic transfer. Cash gifts are not accepted due to lack of traceability.
Approved donors typically include family members, a spouse or fiancé, employers, certain close friends, or charitable organizations for some loan types. Individuals financially tied to the home purchase, like the seller or real estate agent, cannot provide gift funds.
Mortgage gift funds rules vary by loan type. For instance, FHA loans allow the full down payment to be gifted, while conventional loans may require some of the down payment to come from the borrower’s own funds. VA and USDA loans also allow gift funds for closing costs or voluntary down payments.
Gift recipients don’t owe taxes on gifted amounts; however, donors must consider IRS gift tax rules. In 2024, the annual gift tax exclusion is $18,000 per person. Gifts above this threshold may require filing a gift tax return, though most donors won’t owe taxes due to the large lifetime exclusion.
For a smooth mortgage process, clear communication with your loan officer about gift funds, their timing, and documentation is essential. Properly documented mortgage gift funds can make homeownership more accessible, letting loved ones support you toward your dream home.
Learn more about down payments and the role of a gift letter in mortgage approval on FinHelp.io.
Sources:
- Consumer Financial Protection Bureau: How to use gift money for a down payment
- IRS.gov: Gift Tax Frequently Asked Questions
- Forbes Advisor: FHA Gift Funds Rules
- NerdWallet: How to Use Gift Money for a Down Payment
