gifting a houseIf you’re lucky, you’re given a great many gifts in your life. Sometimes these gifts are material things like a Buzz Lightyear action figure or an Easy Bake Oven that was used exactly once before both you and your parents realized it was just easier to bake an actual cake in a real oven.

Sometimes you’re given the gift of knowledge. I’ve had at least five excellent teachers and mentors that had an enormous influence on my writing and what I’m doing today.

The gift can even be a good friend who has seen you both laugh and cry – someone who’s always there.

You may think of all these things as great gifts you’ve obtained over the course of your life, but did you know the down payment on your house can be a gift? It’s true.

In this post, we’ll go over how you can use gift funds to help fund your down payment or other mortgage-related costs.

Who Can Give a Gift?

Before we go over the different types of gifts and what they’re used for, we first need to discuss where the gift can come from. For Fannie Mae, Freddie Mac, jumbo and VA mortgages, the gift must come from a member of your immediate family (including your spouse, domestic partner or fiancé) or close extended family (grandparents, aunts or uncles).

With an FHA mortgage, the gift can come from any of those sources or the following:

  • A close friend who wants to see you do well
  • An employer
  • A labor union
  • A government agency
  • A public entity such as a nonprofit that provides homeownership to families of low to moderate income first-time home buyers

You can use this search engine to find nonprofits that provide FHA assistance in your area.

Gift Requirements

There are two types of gifts that your relatives or contacts can provide: a cash down payment gift or, in the event a family member is selling the property to you, a gift of equity. In each case, the funds may be used for the down payment, closing costs and prepaid interest points. Depending on the type of loan, you may also be able to use the gift in order to pay off debts so you can qualify for your mortgage. In certain situations, a client has to have a certain amount of payment coming from their own funds:

  • A 5% contribution is required on certain conventional loans if the down payment is less than 20%.
  • There’s a required 5% client contribution on all jumbo loans.
  • If your credit score is between 580 and 619, 3.5% of your FHA down payment has to come from your personal funds.

Show Me the Money: Cash Down Payment Gifts

A cash down payment gift is pretty straightforward. You get money from one of the sources above and use it toward your down payment and costs. There are a couple of things your lender will need from you in order to use the gift:

  • A gift letter (including, among other things, the amount of the gift and a statement that it doesn’t have to be paid back)
  • Evidence of the transfer of funds

You can show evidence of the transfer with the donor’s withdrawal slip and your deposit slip, or a copy of the check and evidence that it’s been deposited into your account. If the gift is made at closing, there must be a copy of the donor’s certified check and a settlement statement with the exact amount of the gift.

For FHA loans coming from a family member or close friend, some additional documentation is required.

We need a copy of the canceled or certified check. We also have to be able to verify that the donor had the money for the check in the account for at least 30 days prior to the gift. This is verified through bank statements.

If the donor borrowed the funds, they need to be able to document the source. The gift cannot come from cash the donor has on hand.

The Family Discount: Gifts of Equity

A gift of equity occurs when someone (usually required to be a family member) sells you a property for below the sale price. The difference between the price you pay and the listed price is considered an amount of equity to be used toward your down payment or to help pay off debt to qualify. It can also be used toward your points and closing costs.

On FHA loans, a client can also get a gift of equity from a nonprofit agency or his or her in-laws.

Gifts of equity are not allowed on VA and jumbo loans.

In order to use the gift of equity, a client must include a gift letter, just as if they were being given a cash down payment. Minimum client contribution requirements still apply as well.

That’s the lowdown on down payment gifts. If you still have questions, let us know in the comments.

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This Post Has 119 Comments

  1. My Husband and I have been signing a letter every year gifting my sister $28,000 as equity in the home we home we own, but let her live in. Now she would like to buy it. Can we use the last five years of gift letters as her down payment and she just pay us the remaining balance on the fair market value of the home? The home is worth $275,000, less the $84,000 gift of equity, and she pay us $135,000?

    1. Hi Lisa:

      If you’ve been giving it to her for the last five years, it should be in her account long enough that she can just use it as regular assets. It wouldn’t be a problem. If she has any questions, she can give one of our Home Loan Experts a call at (888) 980-6716.

  2. I would like to do a Gift of Equity to my stepdaughter and family but they have horrible non existent credit. Had a house foreclosed on them several years ago. Can I still do this?

    1. Hi Jan:

      Their credit has no impact on your ability to give them a gift of equity. However, the problem they’re going to run into is that you need decent credit (580 median FICO® or higher) to get approved for a loan in many cases. Any score below that is considered subprime. Not only would they be paying higher costs for the loan, but not many lenders do those.

      I would recommend they start monitoring their credit with a service like QLCredit. They can pull their VantageScore® 3.0 credit score and report from TransUnion. Because it’s a soft pull, it wouldn’t affect their score. In addition to getting the report and score for free every two weeks, they’ll get personalized tips on how to improve their scores.

      This blog post also has some good general credit building tips. Hope this helps!

  3. I have been renting my brothers house. It is worth $300,000 and he will sell it to me for $220,000. If the $80,000 is considered a gift of equity, will he have to pay taxes on that money?

    1. Hi Asant:

      I’m going to preface what I have to say with the fact that we are not tax experts. For the most definitive advice, you should really talk to a CPA or other tax professional. However, I’ll try to help here.

      Since the gift is greater than $15,000, he does have to file a gift tax return with the IRS. However, your brother can gift up to $5.6 million in his lifetime before yes to pay taxes on any of it. Forbes has more information. I hope this helps!

  4. I’m buying my grandparents house for $120,000, it was just appraised for $160,000. So I have $40k in equity, we are putting the price at $128,000 and using that $8000 for the closing costs. But when it comes to using the gift of equity, will that amount go on to the loan amount ? So 3.5% down is $4480, so will my loan then be for $132,480? Just want to make sure my family is still getting the full $120,000 at the end of the day.

    1. Hi Kyle:

      When you take a gift of equity, the gift can be used to cover both your down payment and closing costs. With that in mind, your loan amount would just be slightly higher because part of your gift of equity would be covering the closing costs. If you agreed on a purchase price of $120,000 with the gift, that’s the amount they would get at the end of the day. If you have any questions, I recommend speaking with one of our Home Loan Experts at (888) 980-6716. Thanks!

    1. Hi Rohn:

      When you get the gift, your family member has to sign a statement in which they identify their relationship to you. It works like a sworn legal statement.

  5. I’m selling my home to my son & daughter in law for 69,000 it’s worth 100,000. What happens to the 30,000 equity that I earned? Do i lose it?

    1. Hi Charmaine:

      Anytime you sell a home for less than what it’s worth, that extra equity is transferred to the buyer, in this case your son and daughter-in-law. I hope this helps!

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