Couple standing in front of house

 

Whether it’s money your grandma has tucked away for the day you decide to buy your first house or wedding card envelopes stuffed with cash and wishes for a long and happy marriage, receiving presents in the form of funds to put toward a down payment can take a huge burden off your shoulders when you’re looking to start the home buying process.

You might assume that you can just use whatever financial gifts your loved ones give you for a 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. Then we’ll go over some important things to know about receiving and using gift funds.

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, such as 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. Your lender will also want to verify that the funds are either in the donor’s account or have been transferred to the recipient’s, usually by asking for copies of the withdrawal and deposit slips, or something similar. You’ll probably want to let your generous friend or relative know this up front, so they’re prepared to provide the proper documentation.

Sample Gift Letter

Your lender may provide you with a gift letter template. If that’s the case, you can simply pass it along to the gift giver and have them fill it out. If they don’t provide you with a template, be sure to ask what their gift letter requirements are.

If you aren’t given a template, here is an example of what your gift letter should look like:

[Donor name, address, phone number and relationship to recipient]

[Recipient name and new property address]

[Dollar amount of the donated gift and date the gift was or will be given]

[Indicate whether recipient will use (or has used) a portion of the gift for their earnest money deposit]

By signing this gift letter, both the donor and recipient confirm that they didn’t receive the gift funds from any person, business or entity that has any interest in the property being sold or any person connected to the transaction, such as the seller, real estate agent, builder, mortgage banker or any entity associated with them. The recipient and the donor also agree that the gift does not have to be repaid.

At the end of the letter, both the recipient and the donor should provide dated signatures.

Timing and Amount Is Key

Say you’ve just gotten married and received a chunk of money to put toward your down payment. While you may be excited to get that cash in the bank, you don’t want these deposits to cause problems when you’re 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 a “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.

Who Can Give Me a Down Payment Gift?

Depending on the type of loan you’re getting, there are differing guidelines regarding who may give a down payment gift to you. Let’s briefly go over those.

Conventional Loans

if you’re getting a conventional loan through Fannie Mae or Freddie Mac, the gift has to come from family. For the purposes of your mortgage, family is defined as follows:

  • Spouse
  • Parent (including step and foster)
  • Grandparent (including great, step and foster)
  • Aunt/uncle (including great and step)
  • Niece/nephew (including step)
  • Cousin (including step and adopted)
  • In-laws (including parents, grandparents, aunt/uncle, brother- and sister-in-law)
  • Child (including step, foster and adopted)
  • Sibling (including step, foster and adopted)
  • Domestic partner
  • Fiancé

If you happen to get a loan from Fannie Mae, they also allow gifts from future in-laws.

FHA Loans

With FHA loans, nearly all of the above are considered family who can give you a gift, including future in-laws. However, some caveats apply.

While cousins, nieces and nephews aren’t able to give your gift under normal family guidelines with an FHA loan, the FHA does allow for gifts from close friends who have a clear interest in your life. This can include extended family like cousins, nieces and nephews and even former spouses.

In addition to the close friend guideline, the FHA also allows for gifts from the following:

  • Employer
  • Labor union
  • Charitable organization

Finally, you can receive funds from a government agency or public entity that provides homeownership assistance to low-to-moderate income or first-time home buyers.

USDA and VA Loans

The USDA and VA don’t place very many restrictions on who can give you a gift. The only stipulation is that it can’t be an interested party. An interested party is someone who is involved in the transaction directly or indirectly. This includes, but isn’t limited to:

  • Seller
  • Builder
  • Developer
  • Real estate agent/REALTOR®

What Are the Limits on Gifts?

There are no limits on the amount someone can give you for a mortgage down payment or closing costs. However, depending on the loan and property type, you may be required to contribute a certain percentage of the down payment from your own funds.

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 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 is 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%, then 5% of your down payment must come from your own funds.

Investment Property

Gift funds cannot be used toward the down payment on an investment property.

What Are the Tax Implications?

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.

In general, you won’t be responsible for any taxes on gift funds. Your donor may be, however, and it might be helpful for you to make sure they’re aware of that. The only occasion where you’d be expected to pay the gift tax would be if you’d agreed to pay it for the donor.

For 2019, the annual exclusion for gifts is $15,000, meaning donors can give up to this amount without having to report it.

If your donor gives you more than that amount, they’ll have to file a gift tax return to disclose the gift. Filing a return doesn’t mean that they’ll have to pay taxes on the gift, it just means that the amount has been counted toward their lifetime gift tax exclusion, which dictates how much money you can gift a person over the course of your lifetime.

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 443 Comments

  1. Question Ref to a gift for a down payment for an FHA loan. I am being told by your company that along with the gift letter that The person giving the money has to provide a copy of their bank statement also. I am finding it hard to get that and to be honest in this day and age with fraud I can’t totally see it from their point of view. I was provided a certified check by my father to assist with the house that has already been deposited. (Less than 60 days) I was just wondering if there is any way around this part since I can’t seem to find this requirement anywhere else except the form that was given on the loan page itself.

    Thank you for your time.

    1. Hi Richard:

      I can tell you that when it comes to gift funds, we’re following FHA policy in this matter. All FHA lenders are required to abide by these. However, I’m going to have our Client Relations team reach out and go over your specific situation and exactly what we need and why we need it. Thank you for reaching out!

  2. My husband wants to gift to his daughter and significant other the amount of $15,000.00 each for the down payment on their first house. The lender is telling his daughter that he cannot gift the money to her significant other, that it should be given to her only.

    My questions are: Why is their lender telling her that her father cannot gift any money to her significant other, only to her. Is this something the lenders tend to do?

    Thank you

    1. Hi Marie:

      If his daughter’s husband isn’t on the loan, the money would be gifted only to his daughter because it’s for the down payment on the mortgage and she’s the one liable for the mortgage. If they’re both on the mortgage, the gift should be able to be in both of their names. It could also be because certain lending products don’t allow you to get a gift down payment from your father-in-law. So it’s standard that the money would just be given to the daughter. I hope this makes sense!

  3. I have a house someone is living in and they want to buy the house from me. Since the house is worth more now then when i bought it I am agreeing to sell the house to them under the appraised value so they can use that equity as a down payment. the amount is going to be 72000. Does someone have to pay the taxes on that amount?

    1. Hi Debi:

      Before I get to the tax question, I want to make sure you know that a gift of equity can only come from a family member under the policies of many major mortgage investors, so depending on the situation, I would just make sure your buyers know that.

      In terms of the taxes, the seller has to claim and theoretically pay taxes on the gift. However, there’s a lifetime gift limit of $11.4 million for the leaving of estates and gifts. You also don’t have to report the gift if it was under $15,000. So in practical terms, you won’t have to pay tax unless you give away a lot of money.

  4. I’m going conventional with 20% down and we are having an issue with the gift funds which are the 20% down. My former inlaws, which are my kids grandparents, are gifting the funds. Under the conventional gift fund rules – does this kinship qualify as family since there were children born of the former marriage? If not, is there a way around this? For example, can the former inlaws gift the money to any of my children who then turn around and gift to me for the loan? Is this scenario acceptable under the conventional guidelines?

    1. Hi Jessica:

      Conventional guidelines are written such that the person giving the gift would have to be your grandparent. Former in-laws cannot give a gift down payment. I’m sorry. If you haven’t already, I do recommend talking with one of our Home Loan Experts at (888) 980-6716 to go over any other potential options you may have. Have a good day!

  5. If I gift my son a down payment to buy a house and only his name is on the loan but his and his wife’s name is on the house. Does that money remain his if they split up or will that get split between the two of them?

    1. The money goes to the mortgage company and then we cut the seller a check for the full purchase price, so it’s not a thing you would worry about down the line if they were to split up. The money is gone when they close. It’s in the house. Hopefully that makes sense.

  6. Hi My Wife has been saving on cash on hand and we plan to use this a for a down payment
    My question is can I deposit this money to my account and have a gift letter before we have the confirmed new address

    we are still shopping around

    1. Hi Jorge:

      You should be able to deposit the check now and when your lender wants to verify the deposit after you find your house, you can then fill out a gift letter at that point because you’ll have the address. If you would like to apply online, you can do so through Rocket Mortgage®. One of our Home Loan Experts would also be happy to go over your situation if you give us a call at (888) 980-6716.

  7. Im going thru underwriting currently. Expected close date is January 18th. I pre qualified for a conventional loan for $135,000. My down payment including appraisal fees is $7,548. I was going to ask a relative to front me the money as a gift which was option 1. If that dosent fall through can I take out a loan for the down payment? Im affiliated with a credit union and bank with Wells Fargo.

    1. Hi Marcus:

      Policies may vary depending on the lender, so I recommend speaking with them. Speaking for us, I can tell you that you can use funds from a loan to close generally as long as it’s secured by some form of collateral. Personal loans and other unsecured forms of funding can’t be used. Hope this helps!

      I should also note just because of the way you worded this that if you do go the gift route, the gift can’t be paid back. That’s considered a major red flag and is not actually a gift.

    1. Hi Askia:

      We can certainly help you look into your options. If you get a mortgage approval now, it’s good for 90 days. You also have the option of locking in today’s rates with a RateShield Approval and the Power Buying Process. If you want to get started online, you can do so through Rocket Mortgage or give one of our Home Loan Experts a call at (888) 980-6716 in the morning. Happy holidays!

    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!

  8. 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!

  9. 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.

  10. 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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