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Using gift money for a down payment

How to put a monetary gift toward your new home

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Saving up the down payment for a home is never easy. But it can be especially discouraging when housing prices are on the rise.

The National Association of Realtors (NAR) reported that the national median existing-home price of $295,300 in June 2020 increased to $410,200 by June 2023. This also means that the amount required for a 10% down payment on a median-priced home has increased by over $10,000 in the past three years.

If you want to purchase a home, you have no choice but to keep on saving — unless you have other means to boost your down payment, like gifted funds. However, there are rules that govern the use of gifted funds for buying a home.

Key insights

  • Gift funds are allowed for all types of home loans, although there are different rules that dictate who the donor can be.
  • There are no specific limits on the amount of gift money that can be used for a conventional, FHA, VA or USDA mortgage.
  • Some mortgage types allow a down payment made up entirely of gift funds; others require that you contribute your own funds for at least part of the down payment.

What is gift money?

Gifted funds for a mortgage are exactly what they sound like: money given to you to help you buy a home. Typically, gifted funds come from family members or friends who want to help a homebuyer secure a property and are willing to chip in some cash to make that happen.

The NAR’s 2022 Home Buyers and Sellers Generational Trends Report noted that 12% of all homebuyers used a financial gift for at least part of their down payment that year. This was especially common among younger buyers, with 25% of homebuyers ages 23 to 31 using gifted funds, compared with just 17% of buyers ages 32 to 41 and 9% of buyers ages 42 to 56.

That said, the amount of gifted funds for a mortgage can vary, as can down payments for a home in general. Data from the NAR shows that the median down payment amount in 2022 was 13%, although that also varies by age, with younger buyers putting down less. Homebuyers ages 23 to 31 made a median down payment of 8%, homebuyers ages 32 to 41 made a median down payment of 10% and homebuyers ages 42 to 56 made a median down payment of 15%.

» MORE: How much should you put down on a house?

Rules for gift money for a mortgage

There are rules that dictate how much gift money a homebuyer can use for a down payment, although these rules differ depending on the type of mortgage taken out.

However, one consistent rule for all forms of mortgages is that the gift cannot come from someone who has a vested interest in the property’s sale, such as its real estate agent or builder.

There are no specific limits on the amount of gifted funds that a homebuyer can receive for a primary residence with a conventional mortgage.

However, gifted funds must come from eligible sources of funds and cannot be accepted on condition of repayment, according to Freddie Mac. Acceptable donors are:

  • A related person, i.e., a family member, long-term romantic partner or “family-like” friend of the homebuyer
  • A trust established by a related person
  • The estate of a related person

If the buyer is purchasing a second home with a down payment of 20% or less, part of the down payment can still be a gift, but the homebuyer must contribute at least 5% of the purchase price to qualify.

Home loans backed by the Federal Housing Administration (FHA) typically require a down payment of at least 3.5%, and the homebuyer must also have enough additional funds to cover closing costs and fees.

Gifted funds for an FHA loan can’t be offered to the homebuyer with the expectation of repayment, and acceptable gifts can come from the homebuyer’s relatives, employer, labor union or close friends. Funds can also be donated by a charitable organization, governmental agency or public entity (e.g., down payment assistance programs).

There is no specific limit on the amount of gift funds that FHA homebuyers can receive, and the entire amount of the down payment can be gifted if other conditions are met.

For a mortgage backed by the Department of Veterans Affairs (VA), gift funds can come from anyone, so long as they are not affiliated with the home’s builder, developer, real estate agent or any other third party with a financial interest in the transaction. The gifted funds cannot be expected to be repaid at any time.

The lender also has to verify that the buyer has received the gifted funds. Acceptable documentation includes a bank deposit slip, a copy of the check or electronic transfer or a certificate of deposit (CD) showing receipt of the money.

VA loans do not have limits for gifted funds; however, gift money cannot be used to meet reserve requirements.

Home loans offered through the U.S. Department of Agriculture (USDA) allow gift funds from “uninterested third parties,” provided the funds do not need to be repaid.

There are no limits on the amount of gift funds that buyers can use toward a USDA loan down payment.

How to use gift money

When it comes to receiving and using gift money, it's important to understand that the rules can vary widely depending on the type of mortgage. For example, Freddie Mac requires that borrowers who receive gifted funds for conventional mortgages supply a gift letter that explains to the lender where the gift money originated.

Other items required to prove the origin of gift money can include:

  • Proof of transfer of funds from the donor’s account to the homebuyer’s account
  • Proof of transfer of funds from the donor’s account to the settlement or closing agent overseeing the home purchase
  • Proof of transfer of funds from the donor’s account to the earnest money deposit holder (if the gift funds are being used for an earnest deposit)

With VA home loans, lenders are required to verify that gift funds have been transferred to the homebuyer's account (or will be transferred before closing) with documentation like a copy of the homebuyer's bank statement showing the deposit, proof of electronic transfer from the donor to the closing agent or a CD showing that the funds have been received.

Note that gift money that has been in your bank account for more than a few months may not need to be disclosed as gifted funds. That's because, generally speaking, the funds are considered already yours or "seasoned money" at that point. And since most mortgage lenders will only want to see a few months’ bank statements, gifted funds deposited well before that don't face as much scrutiny.

Why do mortgage lenders care so much about gift money and where it comes from? For the most part, they need to verify that you can afford to make the monthly mortgage payments for the home you want to buy with your own funds. They also need to verify that the funds are a true gift and not a loan, as most mortgage lenders do not allow loans to be used for the down payment on a home.

Tax implications for gift money

While it sounds counterintuitive, taxes on gifts are typically paid by the donor, not the recipient. This is to prevent people from avoiding federal estate taxes by giving away all their money before death.

According to real estate investor Dawson Skorczewski of Sioux Empire Home Buyers, there are annual and lifetime gift tax exclusions that determine whether the donor needs to pay gift taxes on amounts they contribute to a homebuyer's down payment. However, tax rules are often complicated, so it's "advisable for the donor to consult a tax professional to understand the potential implications," he said.

The annual exclusion amount for gift taxes is $17,000 for 2023. This means a family member can contribute up to $17,000 toward a homebuyer’s down payment without incurring any gift taxes, or that a couple can contribute up to $34,000 to a single homebuyer without triggering tax liability. And even if a gift exceeds the annual limit, it still might not be subject to any gift tax if the donor hasn’t exceeded their lifetime limit.

» MORE: Tax deductions for homeowners

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    Can a friend give me money for a mortgage?

    A friend can potentially give you money for a mortgage, depending on your relationship with that friend and the type of mortgage you plan to apply for.

    For conventional home loans, Freddie Mac permits gift money that comes from “an unrelated individual with close, family-like ties to the borrower.” Other types of home loans also allow gifted funds from a friend, as long as the friend does not have a financial interest in the transaction.

    What happens if you pay back the gift money?

    If you have to pay back gift money for a mortgage, you're actually taking out a loan rather than receiving a gift. In that scenario, you may be committing mortgage fraud. Ultimately, this is why mortgage lenders typically require gift letters explaining that the gift money is a true gift that never needs to be repaid.

    Is there a limit to how much money someone can gift?

    There are no specific limits on how much money someone can offer in gifted funds for a primary residence. However, there are tax implications for gifts that exceed the annual gift tax exclusion amount.

    Can I borrow the money for a down payment?

    You may be able to borrow money for the down payment on a home, according to the Consumer Financial Protection Bureau. For example, you may be able to withdraw up to $10,000 from certain retirement plans without penalty for the purpose of a down payment. You may also be able to use a 401(k) loan for a down payment if you qualify.

    Bottom line

    Potential homebuyers can use gift funds for a mortgage down payment if they have a qualifying donor who wants to help them get into a property. Even better, there aren't many rules that govern the amount of gift funds a homebuyer can receive, although there may be tax implications for the donor.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. National Association of Realtors, "June 2020 Existing-Home Sales." Accessed July 9, 2023.
    2. National Association of Realtors, "Existing-Home Sales Retreated 3.3% in June; Monthly Median Sales Price Reached Second-Highest Amount Ever." Accessed July 9, 2023.
    3. National Association of Realtors, "2022 Home Buyers and Sellers Generational Trends Report." Accessed July 9, 2023.
    4. Freddie Mac, "Asset eligibility and documentation requirements." Accessed July 9, 2023.
    5. U.S. Department of Housing and Urban Development, "Section B. Acceptable Sources of Borrower Funds." Accessed July 9, 2023.
    6. U.S. Department of Veterans Affairs, "Lenders Handbook - VA Pamphlet 26-7 - Chapter 4 Credit Underwriting." Accessed July 9, 2023.
    7. U.S. Department of Agriculture, "Single-Family Housing Guaranteed Loan Program Origination." Accessed July 9, 2023.
    8. Fannie Mae, "What is required to document gift funds?" Accessed July 9, 2023.
    9. U.S. Department of Veterans Affairs, "Purchase loan." Accessed July 9, 2023.
    10. U.S. Department of Agriculture, "Single Family Housing Direct Home Loans in Indiana." Accessed July 9, 2023.
    11. IRS, "What's New - Estate and Gift Tax." Accessed July 9, 2023.
    12. IRS, "Frequently Asked Questions on Gift Taxes." Accessed July 9, 2023.
    13. Intuit, “The Gift Tax.” Accessed July 11, 2023.
    14. Better Rate Mortgage, "Gift Money And Home Purchases – What You Need To Know." Accessed July 9, 2023.
    15. Consumer Financial Protection Bureau, "Where can I get money for a down payment on a home mortgage?" Accessed July 9, 2023.
    16. IRS, "Considering a loan from your 401(k) plan?" Accessed July 9, 2023.
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