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. Already an expert? Get your mortgage today!

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 387 Comments

  1. Hi,
    Firstly, thank u for this wonderful forum – I’ve already learned a lot from the other Q & A’s. My question (actually 2) is as follows, my husband and I are about to purchase a house. I have money in my account that I would like to “gift” my husband towards this purchase. However, we are not legally married (we were married in a religious ceremony but not civilly for various reasons). Would the bank accept that this is a loan from a wife? (We have been together for 4 years now, but don’t file taxes together). I understand the loan has to be from a close relative, hence the question.
    Second question is, I wouldn’t be able to be on the mortgage, as I don’t have a good income and it would complicate things, but can my name be on the deed? Or would that be a problem?
    Thank u in advance for ur time and input.

    1. Hi Julia:

      All the loans we offer allow gift down payments from a domestic partner, so that would work for you. You can also be on the deed without being on the mortgage. Hope this helps! If you and your husband would like to go over your options, he can be preapproved online through Rocket Mortgage or give one of our Home Loan Experts a call at (888) 980-6716. We’ll be happy to talk to him. Thanks for reaching out!

      Thanks,
      Kevin Graham

  2. […] such as alimony or bonuses that affect income. For monetary gifts, buyers must show a signed gift letter from the person who gifted money. Mortgage lenders can provide this form to […]

  3. My wife’s dad is building a small home and horse farm. My wife wants to put 100k towards the farm since we have horse with him. Can she be on the deed and not the mortgage? Also, it wouldn’t be a gift so not tax implications?

    1. Hi Brian:

      Your wife can be on the deed and not the mortgage. It might be a gift for mortgage purposes because she’s not on the deed. However, I would recommend talking to one of our home loan experts for more definitive guidance. You can get in touch with them at (888) 980-6716. As far as the tax implications, I’m really going to recommend talking to a certified tax professional.

      Thanks,
      Kevin Graham

  4. I am currently trying to sell house. The buyers are friends and need 3.5% of $100k down for loan to purchase house. Does gift money for down payment have to be direct family? Can a friend give the 3.5% as a gift and just provide a gift statement?

    1. Hi Andrew:

      If you were to give them the gift, that would be considered a gift of equity since you’re the seller. Only family is allowed to do that. I’m sorry.

      Thanks,
      Kevin Graham

  5. My wife and I are planning on getting a house soon. Hopefully by the end of the year. My dad recently told us that he has been saving money to gift us to use for down payment. He said he has $10K saved. However, most of this money is in a vault he keeps at home. Is it possible to use that money as a gift towards our downpayment even if there is no trace from a bank statement?

    1. That’s great news John! If you’re using gift money as part or all of your down payment, you’ll need your dad to write a gift letter to the mortgage company that makes it clear that the money is a gift and not a loan. However, depending on the type of loan you plan on choosing, the gift letter alone may not be enough evidence for the mortgage company, so your dad might be required to provide a bank statement in addition to the $10K. The best way to know for sure is to speak with one of our Home Loans Experts at (888) 728-4702. When you speak with one of our experts, you can discuss loan options and gift money requirements. I hope this helps! -Allison Hendricks

  6. I am buying a house that has a tenant for another 6 months. After that I will be moving in and it will be my primary residence. I am told that I must purchase it as investment property. Is that true? Also my sister is going to give me $14,000 to help with the down payment, but my lender said gifts (it’s not a loan) are not allowed for investment property. Is that true? Thanks for your help.

    1. Hi Kate:

      Unfortunately, both of those things are true. For you to purchase it as your primary residence, you would have to move in within 60 days. In this case, it would be an investment property. Gift funds aren’t allowed on investment property. I wish I could give you better news.

      Kevin Graham

  7. Hi, I am buying a home and my brother is helping me with $70K towards down payment. I will repay him back after a few years. Now my lender tells me that I can’t use loan money (even from immediate family member without interest) towards down payment. I can use gift money though. however, we recently heard that he is liable to pay gift-tax. What do you think in this case? Should we go ahead and declare this as gift and pay gift tax even though I am going to repay him the money in entirety in a few years (2-3 years) from now.

    Thanks
    Sam

    1. Hi Sam:

      For starters, I would be very careful about this. He’s willing to give you the gift, you should take it as a gift. Otherwise, it could be considered mortgage fraud. I would talk to your lender. You can’t pay it back. As far as tax, you would have to talk to a tax professional for the best advice the IRS does have gift tax exemption limits.
      Thanks,
      Kevin Graham

  8. If my dad wants to take money from his line of credit and give it as a gift to me for my down payment does that work?

    1. Hi Mandy:

      Depending on the type of loan you get, your father may have to document where he got money from, but the short answer is yes.
      Thanks,
      Kevin

  9. I recently got married and we are starting to save for our first home. I was preapproved for a conventional loan but my husbands credit score is too low so currently the loan will only be in my name. I will be saving about 2k of my own money, and he will be taking a premature distribution from his 401k of probably 10k (8k after they tax it). Would it be a problem for me to deposit that now, 6 to 12 months before we buy a house? Should I wait to deposit it, or maybe make multiple smaller deposits? He will show bank statements and write a letter if thats required, I just figured it’d look better to have the funds showing in my account for a longer period of time. Whats the desirable way to go about this? I apologize if a similar question was already asked and answered. Thank you!

    1. Hi Sara:

      Since you are ready to document things, it doesn’t really matter when it goes in, but it would certainly be easier if you did it now and it was in your account for a while. That just makes things a little smoother down the line.

      Thanks,
      Kevin Graham

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