Couple standing in front of house

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 a down payment, but using gift money is not as cut and dry 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. Then we’ll go over some frequently asked questions.

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 – they want to make sure any large deposits (other than something regular like your paycheck) are your actual assets. This includes making sure any deposits in your account from friends and family that you plan to use for a down payment are gifts, not loans.

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.

What Is a Gift Letter for a Mortgage Down Payment?

As it applies to your mortgage, a gift letter is a note from the donor that says you don’t have to pay the money back. 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 Property 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 properties.

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

Primary Residences

If you’re getting a primary residence, you can use gift funds for your down payment. These guidelines apply:

  • If it’s a single-family home, you can always use gift funds without having to contribute any of your own money to your down payment.
  • If it’s a multi-family home, you can get a home without having to contribute to the down payment as long as the down payment is 20% or more. If your down payment as 20% or less on a multi-unit home, you have to contribute at least 5% of your own funds to your down payment.

Second Homes

If you’re getting a second home through a conventional loan (you can’t get them through the FHA, USDA or VA), the following guidelines apply regarding gift limits:

  • If you’re making a down payment of 20% or more, all funding for the down payment can come from the gift.
  • If it’s less than 20%, 5% of your down payment must come from your own funds.

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. Let’s go over some further details on how gift money impacts underwriting.

Timing

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. What’s the criteria for “large deposit”? It’s any single deposit that exceeds 50% of the total monthly qualifying income. This is for conventional, VA and jumbo loans.  For FHA and USDA loans, a large deposit is defined as any deposit that is greater than 1% of the adjusted purchase price or appraised value, whichever is lower.

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. If you normally had $2,000 in your checking account and you suddenly have a deposit for an extra $8,000, they would want to verify that regardless of the purchase price/appraised value or qualifying income. We would dig deeper into that situation, just to make sure the situation checks out. 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.

Gift Money FAQs

Now that we’ve gone over the basics of gift funds, we’ll answer a few of your common questions.

How Much Can You Gift for a House?

There’s no limit to the amount of money that someone may gift for a house. However, you may or may not have to report the gift on your taxes. We’ll go over the limits for that below.

How Much Money Can Be Gifted for a Mortgage?

Similarly, there are no limits on how much someone can give you for a mortgage down payment or closing costs. The only stipulation is that mortgage investors may require you to contribute a portion of their own funds to the down payment depending on the loan and property type. Those guidelines are outlined above.

How Much Can You Gift Someone Tax-Free?

Tax laws change on a fairly regular basis and you should always speak with your financial advisor or tax professional in order to make sure you’re in compliance with the most current law.

With that in mind, here are the most current guidelines for the 2018 tax year.

For tax purposes, gifts and estates are bundled together.

The amount you can exclude from your taxes between gifts to people and whatever you leave behind in your estate is $11,180,000. Any estates or gifts left below that amount aren’t subject to taxes.

In addition, as of 2018, you can now gift up to $15,000 per year to people without having to report it and count the amount toward your gift tax limit. This is also on a per person basis, so if you wanted to donate $15,000 to each of your grandchildren’s college funds, you could.

Typically, this tax is paid by the donor. If you agree that the recipient will pay the tax, talk to your tax professional.

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? Get started online or give us a call at (800) 785-4788 to speak with one of our Home Loan Experts!

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This Post Has 427 Comments

    1. Hi Stephen:

      I’m sorry for the late response. If you’re looking for a personal loan, our friends at RocketLoans can help you look into personal loan options. If you’re looking for money for a home, you can get started online through Rocket Mortgage or give one of our Home Loan Experts a call at (888) 980-6716. Hope this helps!

  1. What if you have a high debt to income ratio, and someone pays off $20,000 of your credit card/student loan debt directly to the lenders themselves. So no money is deposited, but the other debt is cleared out. Would that require letters and documentation too/a waiting period, or is it better to keep the debt and put the gift down on the home loan? Thank you.

    1. Hi Greg:

      In most instances, you can use the gift funds themselves as a source to pay off the debt. That would require a gift letter, but it might be the easiest way to do something like this. I’m going to recommend you speak with one of our Home Loan Experts at (888) 980-6716 to go over the details of how this would work. Hope this helps!

  2. My father has dementia and is in a nursing home. I am his power of attorney. He has enough in his investment accounts to cover our down payment, and we have the same financial advisor. The advisor agrees that he would give us the money, but he is not able to write a gift letter because of his mental condition, and the advisor can’t write the letter because of legal reasons. Is there any way for me to get a loan in this situation?

    1. That’s a good question. You may be able to do it because you have his power of attorney. However, I would advise you talk to an elder law attorney local to you to go over this situation and make sure that’s the case in your area.

  3. My father is going to gift my common law wife and I $20,000 to assist with a downpayment. He is interested in giving it to us in two chunks (Dec. and Jan.) to avoid having to deal with the tax forms.

    This leads me to a few questions:
    -If we close in Jan. will we need two gift letters?
    -Will this look bad on an application?
    -Would it be simpler to give my spouse $10k and me $10k sooner so it is seasoned?

    1. Hi Nick:

      I’m going to go ahead and take these in order.

      Transfers to you on two different dates would require two different gift letters.

      No. Lenders don’t care how you get the money as long as it’s legally sourced.

      The only time you would have to worry about seasoning of the funds is if you were getting an FHA or VA loan, for example, where we need to see a bank statement that shows the transaction clearing your father’s account in order to comply with government requirements. Other than that, we would just need documentation of the transfer which we can go over with you. I hope this helps! For more advice on your personal situation, you can go ahead and speak with one of our Home Loan Experts at (888) 980-6716. Have a good day!

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