Using Gift Money for Your Down Payment: What You Need to Know - Quicken Loans Zing Blog

I’m getting married in July, and we’re hoping to buy a house when our lease is up in September. We’ve spent a fair chunk of change on our wedding, but (fingers crossed!) we’re hoping to get at least some of the money back as wedding gifts, and some of our relatives have hinted that that’s what we’ll be getting. Don’t get me wrong: I’m pretty darn excited to get a toaster oven, nice dishes, stemware and all that, but I certainly won’t turn down money for a down payment.

You might think that you can just use whatever financial gifts your friends and family give you for your down payment, but using gift money is not as cut and dried as you might think. Whether you have $20 or $20,000, the source of the funds in your bank account will matter just as much as how much money you actually have. To understand why the source of your funds matters to your mortgage company, you’ll first need to understand what underwriting is and how it impacts your loan.

Understanding Underwriting

Underwriting refers to the process in which your lender looks at your credit score, income and assets to determine how risky it would be to lend you money. When underwriters look at your assets, they check to make sure that the money in your account is indeed YOUR money – that is, they want to make sure any large deposits in your account are gifts, not loans, from your friends and family. This is essential to ensuring that you can actually afford your mortgage payment and that you’ll be likely to pay the loan back. If you used a personal loan to qualify for a home loan, chances are you’d be left with a big financial mess once you had to start paying both loans back.

So how can an underwriter establish that deposits in your bank account are gifts and not loans? They’ll need the gift-giver to write a gift letter. Let’s take a look at what that means.

Gift Letters

If you’re using gift money as part or all of your down payment, you’ll need the donor to write a gift letter to your mortgage company that makes it clear that the money is a gift and not a loan. Here’s what your gift letter should include:

  • The donor’s name, address and phone number
  • The donor’s relationship to the client
  • The dollar amount of the gift
  • The date the funds were transferred
  • A statement from the donor that no repayment is expected
  • The donor’s signature
  • The address of the property being purchased

It’s important to understand that the gift letter in itself may not be enough evidence for the mortgage company. If you’re getting an FHA loan, the person who gives you the funds will be required to provide a bank statement in addition to a gift letter – so you’ll probably want to let your generous friend or relative know this upfront.

Gift Money and Your Loan Type

One thing to consider is that the amount of gift money you use in relation to how much of your own money you put down may impact what kind of loan you can get. Here are some rules about gift money as it relates to different types of loans.

Conventional

  • If you put down 20% or more, it can all be from a gift.
  • If you put down less than 20%, part of the money can be a gift, but part must come from your own funds. This minimum contribution varies by loan type.
  • You can only use gift money on primary residences and second homes.

FHA and VA

  • All of your down payment can be gift money.
  • If your credit score is between 580 and 619, at least 3.5% of your down payment must be your own money.
  • You can only use gift money on primary residences.

Keep in mind that these rules are subject to change based on lending laws – so check with your mortgage company for up-to-date guidelines.

How the Timing and Amount of Gift Money Impacts Underwriting

After my wedding, I’ll (hopefully) have checks to deposit – but I don’t want these deposits to cause problems when I’m trying to qualify for a mortgage. I spoke with Lindsay Villasenor, a Quicken Loans divisional vice president, to get some further details on how gift money impacts underwriting.

Timing

According to Lindsay, Quicken Loans requires a 60-day history of assets for qualification purposes. As long as you have documentation for the past 60 days, your mortgage company can take it from there.

Amount

So within that 60-day period, which deposits do you have to worry about getting a gift letter for? Grab your wedding veil and jump into this hypothetical situation with me for a moment.

You just got married. Aunt Sue gave you a $75 check, but Grandma Betty gave you $10,000 for tying the knot (you’ve always suspected you were the favorite grandkid). Will you need gift letters for both deposits?

In general, your underwriter will need to verify the source of any large deposit. So what’s the criteria for “large deposit”? According to Lindsay, it’s “any single deposit that exceeds 50% of the total monthly qualifying income.” This is for conventional, VA and Jumbo loans.  For FHA, the threshold is 25%. Let’s say you are doing a conventional loan for our example. If you make $4,000 a month, any deposit over $2,000 would probably be questioned by your underwriter. Therefore, the underwriter will probably want to verify that Grandma Betty’s $10,000 gift is a gift, not a loan, so you’ll need to ask her for a gift letter. Aunt Sue’s gift, however, is small enough that the underwriter might not question it.

Of course, this is partially up to the underwriter’s discretion. If there are any deposits that seem to be out of the ordinary, your underwriter may question them regardless of your income. Here’s an example that Lindsay gave: “If a client only maintains a $400 balance on a regular basis, but all of a sudden has a $5,000 deposit, even though that $5,000 may not be over 50% of the total income, it raises a red flag.” So we would dig deeper into that situation, just to make sure the situation checks out. So while your Aunt Sue’s small gift might not be questionable in itself, if the underwriter finds that it’s out of the ordinary, he or she may require gift documentation.

If you know that you’ll be getting any financial gift to help with your down payment, be prepared to document it for your mortgage company. Do you still have questions about using gift money for your down payment? Speak with a home loan expert today or comment below, and we’ll get you some answers!

 

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This Post Has 159 Comments

  1. Hello,
    My fiance and I just put an offer in on a house and are waiting to here back from the seller currently. My boyfriend unfortunately has terrible credit and is unable to be put on the mortgage so it will just be under my name. Here is my question… he has a very generous family and they are gifting us 40,000 for a down payment on the home. Since they are not technically my family yet how would you recommend going about the gifting process? It is a conventional loan.

    1. Melissa:

      I’m not sure at what point they can be considered your in-laws for purposes of this. I’m going to pass you to one of our Home Loan Experts to see if the gift could be used before you’re married. You could always go to the courthouse and still do the ceremony and reception later, I suppose. That might be another option. Anyway, we can get you the answer your question. Congratulations on this exciting time!

      Thanks,
      Kevin Graham

  2. I have a quick question. My parents want to gift my wife and me money for our down payment. The problem is they have the money in cash. Can they gift over cash to us for our downpayment? We are trying to do an FHA loan and the amount is $25,000 in cash.

    Thank you,

    Andrew

    1. Hi Andrew:

      Unfortunately, in order for the gift to work, they have to pay by check and the money has to be in your account for 30 days. I wish I could give you better news.

      Kevin Graham

  3. I loaned my father $2000 a few months ago and he will be paying me back this week. My husband and I are in the process of buying a home and need to submit our bank statements. Is a gift letter still needed even though technically it is repayment? We have enough for our down payment (and about $4000 extra after bills) but are afraid the underwriters would want to see even more. Should we just leave the money out of our account until after we submit our statements?

    1. Hey Shae:

      That’s a good question. My gut says it’s not a gift if it’s a repayment, but I’m going to forward your question to one of our Home Loan Experts to give you a more definitive answer.

      Thanks,
      Kevin

  4. My auntie gave me $15,000 gift for buying a house . So if I let my mortgage know that is a gift from my auntie. Do I have to pay tax ?

    1. Hey Helen:

      The question of whether you have to pay taxes on it is better left to a tax adviser. That’s what I recommend.

      Thanks,
      Kevin Graham

  5. My fiancé is getting pre approved right now by himself but I want to be able to gift him a portion of the down payment when we make an offer. We are doing a conventional loan but I’m wondering if lenders allow me to gift if we aren’t technically “family” yet?

  6. We recently signed an agreement to purchase a home. We are using FHA financing, my question is about the money for down payment/closing. We are wanting to use my check deposits from my job for this next 6 weeks as our down payment money. Are there any rules against using earnings deposits and down payment money, even the deposits right up until closing? Of course my whole checks won’t need to go to down deposit but probably about 1/2 of it. The other half will go need to go for my regular bills.

    1. Hi Jessica:

      I’m not sure about the answer to that question, but I’m going to get it to someone who does.

      Thanks,
      Kevin Graham

  7. I have a very generous friend who is gifting me money for my down payment on my home. I was told by my mortgage broker that a gift for mortgage down payment has to come from a family member. Is that true? I really don’t get why it would matter if it was a gift and there is a gift letter stating what it’s for.

    1. Hi Kim:

      It’s possible to get a mortgage with gift money for the down payment from a close friend only if you get a loan through the FHA. If it’s a conventional loan or through the VA or jumbo, you do have to get the money from a family member. They have different requirements in terms of the mortgages they’ll allow. I wish I could give you better news, but hopefully this clears things up.

      Thanks,
      Kevin Graham

  8. If I don’t have a home I’m buying until further into the future, does the gift letter have to have the address of the property being purchased? I mean, because it doesn’t exist yet. Can the letter just state that the deposit is to be used for a down payment on a house? Also, can it be deposited into my bank account with the rest of my own money? Because I recently read an article that said it could not be mingled with other monies. Please help! I have so many questions and no idea with whom to speak with. I’m afraid to go to a loan officer and ask questions because all the information about down payments and such have me scared that I will screw up and not be able to buy my first home.

    1. Hey Arian:

      Never be afraid to ask questions. To answer your first question, the address of the property being purchased may or may not be necessary depending on what type of loan you’re getting. I’m going to pass your information along to a home loan expert so we can get into more specifics and answer any and all questions you may have. You won’t screw up. You’ll be just fine and we’re going to help you get into that home.

      Thanks,
      Kevin Graham

  9. I gave my now ex-fiance $2,000 as a gift for a down payment on our condo. The plan was to put my name on the title, however, that never happened. At this point, I’m still living in the condo while he isn’t allowed back until at least the 7th of January due to a domestic violence situation. I technically have no right to this property, so I’m basically waiting for him evict me. My question is on whether or not that gift money gives me any ownership rights to the condo?

    1. Hi Gosia:

      Unfortunately, the answer to that question is no. A gift is a gift in this case. I wish I could give you better news, but I wish you the best of luck moving forward.

      Thanks,
      Kevin Graham

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