If you are saving to purchase a home, receiving money to put towards your down payment and closing costs can help make your homeownership dreams come true sooner.
If you receive a check towards your down payment, you might assume that you can simply bank the check into your savings account. However, using money that’s been gifted to purchase a home is not as cut-and-dried as that. There are specific guidelines you must follow, so you don’t jeopardize your home purchase.
We recommend sharing this article with each donor, so they know their obligations, too.
What to know if you are receiving gift money
When you apply for a home loan, you will be required to provide recent bank statements. During the underwriting process, the underwriters will review all your assets and require confirmation that any large deposits outside of your regular paycheck are your legitimate assets.
Any monies that have been gifted must be supported with a gift letter from the donor stating that the money is a gift, not a loan, and does not need to be paid back. The amount that you’ve deposited must exactly match the amount stated in the gift letter. Any expectation of repayment will affect the amount of your mortgage approval.
The current limit to receive a monetary gift tax free is $17,000 per donee in 2023. You will be taxed for monetary gifts above $17,001. However, multiple donors can gift you up to $17,000 each, providing they each provide you with separate documentation. The annual montetary gift exclusion limit increases to $18,000 in 2024.
Read the IRS frequently asked questions on gift taxes >
How a monetary gift can affect your eligibility for a specific home loan program
Some loan types have strict guidelines regarding how much money a borrower must personally contribute to the down payment, in addition to any monies provided as a gift. Here are some rules about gift money as it relates to four of the most common loan types.
Conventional home loan – The borrower is not required to contribute to the down payment from their own funds when purchasing a primary residence. All funds can be a monetary gift. Read the Fannie Mae guidelines for personal gifts >
FHA home loan – If you have a credit score of at least 620, the full amount of the minimum 3.5% down payment for your primary residence can be gift money. The gifter will need to provide a bank statement. Read the FHA loan rules on down payments and gift funds >
VA home loan – Gifted funds may be used to pay the VA Funding Fee and other loan costs. The gifter is not required to furnish a bank statement. A canceled check is enough proof for documentation. Read about who can pay for the VA funding fee and loan closing costs >
USDA home loans offer zero down payment loans to purchase properties in specific geographic regions. Still, borrowers can use gift funds for closing costs as long as they can be verified and meet other loan program and lender requirements. Read about Gift Funds on page 30 >
Before qualifying for a home loan, we recommend that you speak to a licensed loan officer for advice on using a monetary gift for your home loan down payment. Both the gifter and the recipient should also speak to a professional tax advisor, too.
What to know if you are giving gift money
Provide the recipient with a gift letter stating that the money is indeed a gift, which is not repayable. The gift letter should include the following information:
- Donor’s name, address, and phone number
- Donor’s relationship to the recipient
- Exact dollar amount of the gift
- Date the funds were transferred
- Statement from the donor that the money is a gift and no repayment is expected
- Address of the property being purchased, if known at the time
- Both parties sign and date the letter
The donor should be prepared to provide a bank statement to show the full amount being deducted from their account.
A single donor can give a monetary gift tax free to the recipient up to $17,000 in 2023. (Increasing to an annual limit of $18,000 in 2024.) If you want to give more, you and your spouse, or another relative, can each give the homebuyer an amount up to $17,000. However, each donor must provide the recipient with a gift letter and be prepared to provide bank statements to document their specific gift amount. Read the IRS frequently asked questions on gift taxes >
Who is eligible to give a homebuyer a monetary gift?
Depending on the type of home loan you are using to finance your home purchase, each program has its own guidelines that state who may give a down payment gift.
Conventional Home Loans through Fannie Mae or Freddie Mac require the gift funds to be furnished from a relative, which they define as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship. Gift funds can also be provided by a fiancé, fiancée, or domestic partner.
FHA Home Loans will accept monetary gifts from relatives. Additionally, the FHA will allow gifts from close friends who have a clear interest in your life.
The FHA also allows for gifts from an employer, labor union, charitable organization, and government agency or public entity that provides homeownership assistance grants or programs to low-to-moderate income or first-time home buyers.
USDA and VA don’t have many restrictions on who can give you a financial gift towards your down payment.
All home loan programs have the stipulation that an interested party can’t provide financial gifts. An interested party is someone who is involved in the transaction directly or indirectly, such as the seller, builder, developer, or real estate agent. Gifts from these sources are considered inducements to purchase and must be subtracted from the sales price.
