Using gift funds for a down payment

It’s not news that homeownership can be a great way to build wealth through equity — but it’s also not news that it’s expensive to get started. According to the most recent data from the National Association of Realtors, the median price of a home in the U.S. was more than $350,000 in May 2021. Even with a minimal down payment of 3.5%, that means you’d need more than $12,000 available to get a mortgage loan started, not to mention closing costs, PMI… the list goes on.

It’s no surprise, then, that many in the housing market, and first-time home buyers in particular, turn to generous relatives and friends who might be able to offer gift funds for a down payment. A down payment gift can significantly lower the barrier to entry for many aspiring homeowners, but there are some stipulations to bear in mind. Here’s what you need to know.

Can I use gift money for a down payment?
The answer is: yes, but there are some rules and limitations. Your ability to use gift money to jump-start your mortgage will depend on who your mortgage lender is, what type of property you’re buying, and who the gift money is coming from.

That’s because mortgage lenders are always taking a calculated risk by offering hundreds of thousands of dollars up-front to borrowers. The key word there is calculated. As part of the underwriting process, lenders assess not only how much money you have to put toward your down payment, but also where it comes from, all in the hopes of accurately predicting whether or not you’ll be able to successfully pay off the loan. (This is the same reason they check your credit score, employment status, and a paper trail of other financial markers.)

Who can give me down payment gift funds?
Generally speaking, lenders are happier to see down payment gift funds coming from people closer to the borrower, such as a family member or spouse, than they are from more distant sources, like a friend. However, the specifics do vary based on your lender — and while it’s always a good idea to check with your lender directly about their specific rules and regulations, here’s the basic breakdown.

Conventional Loans
Most conventional mortgage lenders — whose funds aren’t secured or subsidized by a government agency — accept gifted deposits only from family members. Fannie Mae and Freddie Mac, the agencies that set the standards to which conventional home lenders must conform, names only the following people as acceptable deposit gift donors:

  • relatives by blood, marriage, adoption, or legal guardianship
  • fiancé/es and domestic partners

This means that a sister-in-law or step-niece could provide a deposit gift, but not your closest friend from high school.

FHA Loans
The Federal Housing Administration, or FHA, insures mortgages from approved lenders, which means those lenders can afford to offer loans with lower down payments (there’s that 3.5% we talked about above) and more lenient credit qualifications.

The FHA does allow lenders to accept gifted deposit money as part of a down payment, and the funds may come not only from blood relatives, but also from close friends. You can also use funds from your employer, labor union, a charitable organization without tax-exempt status, and government agencies or public entities designed to provide down payment assistance to lower income or first-time home buyers.

VA and USDA Loans
The Department of Veterans Affairs (VA) and the Department of Agriculture (USDA) insure home loans offered to veterans and eligible borrowers purchasing property in certain parts of rural America, respectively. These types of loans have some of the most lenient restrictions on who can offer a deposit gift — and sometimes don’t even require a down payment in the first place.

For these loans, the only unacceptable deposit gifts would be ones coming from “interested parties,” such as a builder, developer, real estate agent, or seller.

Are there limits on the size of a mortgage down payment gift?
While there usually isn’t a limit on how much a down payment gift donor can offer, some lenders may require a certain percentage of the down payment to be from your own funds. (This is particularly true for those financing a second home, an investment property or a multi-family home, especially if putting down a deposit of less than 20% of the purchase price.)

Always check with your lender to ensure you understand their specific rules and regulations regarding down payment gift amounts as well as eligible donors.

What is a gift letter and why do I need one?
While applying for a mortgage, you’ll generally need to provide a wide range of documentation, including tax paperwork, bank statements, and more. And if you’re planning to use gift funds as part of your down payment, you’ll also need a gift letter written by the donor to show the lender the funds truly have been gifted rather than loaned.

A standardized gift letter template may be provided by the lender for your donor to fill out, but even if it’s written from scratch, it should include the following at minimum:

  • The donor’s name and contact information
  • The donor’s relationship to you, the borrower
  • The address of the property you’re purchasing
  • The exact dollar amount of the gift
  • The name of the bank the funds will be transferred from, and the date of the transfer
  • An explicit statement that the funds are being gifted rather than loaned (i.e., no repayment is expected)
  • The donor’s signature

Your lender may require additional documentation to further verify the transfer, such as deposit slips or withdrawal slips, too.

Can I repay my mortgage gift?
Nope! Gifts you pay back have another name: loans. And a loan, even from a friend or family member, is a different matter than a gift in the eyes of your mortgage lender. That’s why a gift letter is a requirement for gifted down payment funds.

What are seasoned funds?
Along with the amount of money you have and where it comes from, mortgage lenders may also pay attention to how long you’ve had it — a concept which is also referred to as “seasoning.” That is to say, the longer an amount of money has sat in your bank account, the more seasoned it is.

This is important for down payment gifts because money that’s been in your account for more than 60-90 days may not be counted by the lender as a deposit gift, even if it was initially gifted to you. That means those funds could count as a personal contribution toward the down payment and might also not require a gift letter. Again, it’s always important to double-check with your lender specifically and to be upfront and honest at every step of the qualification and approval process.

Are there any tax implications on a gifted deposit?
Good news: as the borrower/giftee, you probably won’t be on the hook for any taxes on the down payment gift you receive. For your donor, however, it may not be so simple.

The IRS does assess a gift tax on monetary gifts that exceed the annual exclusion, which for 2021 is $15,000. If you have further specific tax-related questions, it’s a good idea to talk to a qualified tax professional.

Could a Non-Traditional Loan help me unlock my dream home?
While down payment gifts are one way to boost yourself over the homeownership hurdle, they still aren’t always enough for non-traditional income earners, such as small business owners or those working in the gig economy. Even if you have the cash at your disposal, you might not be able to “prove” your eligibility to the austere standards of certain mortgage lenders.

But with Quontic, things are a little different. As one of the only 3% of U.S. banks bearing a CDFI certification, we’re committed to helping non-traditional earners, as well as low-income families and others, pave the way for a bright financial future. One of the coolest ways we’re doing that? Our Non-Traditional Loans1.

Non-Traditional Loans rely on your overall financial profile and credit history rather than the standard income verification most lenders use, which can help put the keys to your dream home in your hands even if you’ve been told before you’re not qualified.

Additionally, our Non-Traditional Loans allow you to use gifted funds for up to 100% of your down payment, closing costs, and reserves — and unlike many conventional loans, you can use down payment gifts toward investment properties as well as primary residences. We make it super easy to document the gifted funds, too; just provide a copy of your donor’s cancelled gift check or a wire confirmation, and you won’t even need to get a copy of their bank statement evidencing the withdrawal.

Quontic also offers VA loans1 and FHA loans1 along with a variety of other financing options, all with the express mission of offering top-tier financial services to traditionally overlooked communities.

Got more questions? We’re here to help — and we can’t wait to hear from you!


1All lending products are subject to approval. Rates, program terms & conditions are subject to change without notice. Not all products are available in all states or for all amounts. This does not represent an offer to enter into a loan agreement. Other requirements, restrictions & limitations apply. Information is accurate as of July 30, 2021.

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