In spite of having sufficient income to afford a monthly mortgage payment, some would-be buyers defer a home purchase because they lack funds for a down payment. They assume a mortgage isn’t viable at the present time, but this thinking isn’t necessarily true.
If you don’t qualify for a zero-down mortgage (ex. VA or USDA), and if you don’t have enough in reserves for a down payment, there is a way to purchase a home sooner rather than later. Several mortgage programs allow borrowers to use gift funds for their down payment (and closing costs, for that matter). But while this option is available, there are rules about using gift money.
Buying a home is an exciting milestone, but saving up enough for a down payment can be challenging That’s why many homebuyers look to family and friends for financial help through gift funds Conventional loans allow borrowers to use gift funds for all or part of their down payment, closing costs, and reserves.
What Are Gift Funds for a Mortgage Down Payment?
Gift funds refer to money given by an eligible donor to help the borrower with their home purchase. The funds are an outright gift that does not need to be repaid. With a conventional mortgage, the donor can be a relative, future spouse, domestic partner, or any individual with close ties to the borrower.
Gift funds can be used to cover:
- Down payment
- Closing costs
- Required reserves
There are no limits on the amount of gift funds that can be used, as long as there is no cash back to the borrower at closing.
Key Benefits of Using Gift Funds
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Requires less cash savings – Gift funds allow borrowers to buy sooner than if they had to save the full amount themselves. This can be a huge help for first-time buyers.
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Lowers monthly payments – More gift funds means less money needed for the down payment and closing costs. This lowers the loan amount and results in a lower monthly mortgage payment.
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Allows higher loan-to-value (LTV) ratios – Conventional loans allow LTVs up to 97% with the help of gift funds plus mortgage insurance. High LTV loans require less money down.
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Helps cover closing costs – Gift funds can pay for all closing costs so the borrower only needs cash for the down payment. Average closing costs total 3-4% of the mortgage amount.
Conventional Loan Gift Fund Limits
The major benefit of gift funds with a conventional loan is there are no limits, with a few exceptions:
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Investment properties – Gifts cannot be used when purchasing an investment property. Only primary residences and second homes qualify.
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Required investment – If the down payment is less than 20%, the borrower must contribute at least 5% from their own funds. The remaining 15% can come from gifts.
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HomeReady & Home Possible – Have a reduced 3% minimum borrower investment.
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Closing cost credits – Are capped based on the down payment size when received from interested parties.
As long as you meet conventional eligibility requirements, there are no caps on down payment gift amounts.
Documentation Needed for Gift Funds
Lenders will require proper documentation to verify any gift funds used. Here are the typical documents needed:
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Gift letter – Signed by the donor stating the gift amount, that there is no expected repayment, and their relationship to the borrower.
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Proof of funds – Bank statements or other documentation showing the donor had the gift amount in their account.
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Transfer evidence – Documentation showing the gift funds were transferred from the donor’s account to the borrower’s account or directly to the title company. This confirms the money originated from the eligible donor.
Providing a paper trail for the gift funds is key to getting approved by underwriting. Proper documentation also protects the donor and borrower if questions arise down the road.
Eligible Donors for Gift Funds
Conventional loans allow gift funds from a wide range of sources, including:
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Immediate family – Spouse, children, dependents, and other direct relatives.
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Future spouse – Fiancé or partner engaged to marry the borrower.
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Relatives through marriage – Parents, siblings, children, and dependents of the borrower’s spouse or future spouse.
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Domestic partner – Unmarried partners living together.
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Former relatives – Such as an ex-spouse, if the relationship ended amicably.
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Godparents or religious leaders – With close ties to the borrower.
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Unrelated individuals – In certain cases, such as wedding or graduation gift funds.
Gift funds cannot come from an interested party to the transaction, like the real estate agent, seller, builder, or developer.
Down Payment Gift Tax Implications
In most cases, neither party will face gift tax penalties when giving or receiving gift funds for a mortgage down payment:
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Annual exclusion – Donors can give up to $16,000 per year, per recipient, tax-free ($32,000 for married couple gifts).
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Lifetime exclusion – Currently $12.06 million before taxes apply.
Unless the donor has already maxed out their lifetime exclusion, down payment gifts likely won’t face taxation. However, consult a tax professional for guidance on your specific situation.
Tips for Getting Down Payment Gift Funds
If you need help covering your down payment and closing costs, here are some tips:
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Talk to close family first – Parents often help their children buy a first home. Ask your immediate family if they can contribute.
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Consider asking grandparents – Grandparents may be able to provide larger gifts than parents still raising a family.
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Get pre-approval first – This gives the donor a specific amount needed for the down payment and closing costs.
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Have paperwork ready – Provide the donor with the gift letter and make it easy for them to transfer funds directly to your lender.
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Show gratitude – Thank donors sincerely for helping you achieve the dream of homeownership. Consider a small gift after closing.
Alternatives If Gifts Aren’t An Option
If gifts aren’t possible for your situation, some alternatives include:
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Down payment assistance programs – State and local programs provide grants or low-cost second mortgages to help cover down payments and closing costs.
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Mortgage Credit Certificates – Allow first-time buyers to claim a federal tax credit, increasing take-home income that can be used towards housing costs.
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Lender credits – Ask your lender if they offer lender credits to help cover closing costs.
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Save diligently – Reduce spending and direct all extra savings over time to your home down payment fund.
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Explore low down payment options – Conventional loans allow down payments as low as 3% with mortgage insurance. FHA allows 3.5% down.
The Bottom Line
Gift funds can make homebuying more affordable by reducing cash needed for the down payment and closing costs. Conventional loans offer flexible guidelines on gift amounts and eligible donors. Just be sure to document the paper trail. With proper planning, gifts can help you reach your dream of homeownership.
When using the URLs and content below, please identify the frequency of occurrences of entities within that content and write using the correct entities and their frequencies in the article.Please note not to write the “Frequency of Entities” statistics in the article
When writing, use information below as updated : [
https://selling-guide.fanniemae.com/sel/b3-4.3-04/personal-gifts
Frequency of Entities:
- gift funds – 17 times
- donor – 15 times
- down payment – 11 times
- conventional loan – 6 times
- closing costs – 6 times
https://www.mortgageresearch.com/articles/conventional-loan-down-payment-gift-requirements/
Frequency of Entities:
- down payment gift – 10 times
- gift funds – 9 times
- donor – 8 times
- conventional loan – 7 times
- closing costs – 5 times
]
How much can you receive as a gift?
Although personal gifts are accepted, some mortgage programs also limit the amount that can be used toward the down payment, closing costs, and other fees.
If you use a gift with a conventional loan, the donor can gift 100% of your down payment, and in most cases, you don’t have to contribute any of your own funds. You are, however, required to contribute a minimum of 5% of your own funds if the down payment is less than 20% of the purchase price and the property is either a two- to four-unit principal residence or second home.
If you apply for an FHA loan, you may use a gift to pay your down payment if it is received from an FHA approved donor. One of the benefits of using an FHA-insured mortgage is that the entire down payment can be in the form of a gift.
Who can donate gift funds?
Mortgage lenders are specific with regard to acceptable sources of gift money. And unfortunately, your down payment funds can’t come from just anywhere. As a general rule, gift funds used as a down payment on a primary residence or a second home must come from an approved relative, such as a spouse, fiancé, parent, sibling or grandparent.
Other sources are allowed in special cases. For example, some lenders permit gifts from a non-relative such as a godparent, a close family friend, an employer or a government agency. Before approving these funds, the bank verifies the relationship between borrowers and their donors to ensure the donor doesn’t have any interest in the property being purchased. Certain individuals—such as a builder, real estate agent, loan officer or the home seller—can not donate funds toward a borrower’s down payment.
CAN YOU USE GIFTED FUNDS FOR DOWN PAYMENT OR CLOSING COSTS?
FAQ
Are gift funds allowed on conventional loans?
What is the maximum gift amount for a conventional mortgage?
Who are eligible gift donors for conventional loans?
Can you do a gift of equity on a conventional loan?
Can a down payment gift fund a conventional loan?
With a conventional loan, down payment gifts can fund some or all of your: In certain situations involving gifted funds, you may be required to make a personal contribution towards the purchase. But there’s even a way to use gift funds to meet that requirement. We’ll cover both of those topics later in the article.
Can a borrower use funds received as a personal gift?
This topic contains information on personal gifts, including: A borrower of a mortgage loan secured by a principal residence or second home may use funds received as a personal gift from an acceptable donor.
What is a conventional mortgage loan?
A conventional loan is a mortgage that isn’t insured or guaranteed with any government entity. Most conventional mortgage loans allow homebuyers to use gift money for their down payment and closing costs as long as it’s a gift from an acceptable source, such as from family members. Fannie Mae and Freddie Mac define family as the following:
Are gift funds a loan?
Gift letter from donor stating the funds are not a loan. Primary homes and second homes. Not applicable for gift funds. Different mortgage programs have varying rules regarding gift funds. – Varies by lender and mortgage program.