Gift Money for Down Payments: How Can I Properly Use It?

Home buying can be a challenging experience for a variety of reasons. One of the biggest challenges for home buyers is saving up enough money to cover a down payment.

Maybe that’s why a study from the National Association of REALTORS® (NAR) found that in 2019 more than 32% of first-time home buyers got a down payment gift from a relative or friend.

It’s not that surprising that younger home buyers are turning to their friends and family for help: 

• Home values are on the rise (making down payments higher)
• Affordable housing is hard to come by (which makes available properties pricier)
• Many young adults are also dealing with paying off student loans and high credit card debt 
• Record low interest rates make it easier to borrow and harder to save

What else is driving this trend? 

According to data from the U.S. Federal Reserve, Americans aged 55+ are currently sitting on about $90 trillion in wealth. Meanwhile, Americans under 40 only hold nearly $8 trillion. That puts a lot of money in the hands of family members who may have good reason to pass the wealth on now rather than later.

Getting gift money (sometimes referred to as a gift fund) from a family member – or even an outside organization – can be the key that helps you get inside your first home. 

Gift Money for a Down Payment: Why It’s a Good Idea

There are valid reasons why waiting to save enough for a down payment doesn’t always make sense for a buyer. If a close relative is willing and able to gift you money for your down payment, consider it. Sometimes, the gift of down payment money is the gift that keeps on giving.

Start building equity sooner

There’s an old saying about renting and buying that still holds true: When you rent, you’re paying your landlord. When you buy, you’re paying yourself. 

If it’s going to take you more than 3 – 5 years to save enough for a down payment, that’s thousands of dollars going to building someone else’s home equity instead of yours.

Take advantage of low interest rates

Right now, interest rates are at historic lows. But if history has taught us anything, it’s taught us that what goes down will eventually come up. 

If you can get a mortgage at an affordable rate while rates are low, it could save you thousands over the life of the loan. Waiting – because you’re saving up money for the down payment – risks higher interest rates in the future. 

Hold on to your savings

Do you have some money stashed for financial emergencies? That’s a safety net you’ll want to keep intact! If you drain your savings to make a down payment, you may leave yourself vulnerable to future financial worries.

Cover closing costs

When you buy a home, you generally pay about 3% – 6% of your mortgage loan amount in closing costs. Some buyers choose to roll their closing costs into their mortgage. It can save you money upfront, but you’ll be paying interest on those rolled-in costs for the life of the loan.

If you can use your gift money to cover your down payment and use your savings to pay off your closing costs, it can save you money in the long run.

Be move-in ready

After you buy a new home, you’ll need money to cover the moving costs. You may also want to keep cash on hand to cover the cost of any home repairs or improvements you want to make before you start unloading your furniture. 

Getting help with your down payment can help free up cash, so you can deal with moving and making any home repairs or renovations.

Creating an Ask List: Who Can Give a Down Payment Gift?

Depending on the loan, there are different requirements around who can give you gift money. In general, family is usually the safest bet. 

We have a quick breakdown of the gifting rules for conventional loans and Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans.

VA loans specifically allow almost anyone to give you gift funds. But is anyone off-limits for gift money no matter what loan type? Yes. 

You can’t receive a down payment gift from someone considered an “interested party.” That includes builders, developers, mortgage brokers, real estate agents and home sellers.

While home sellers can’t physically give you any money, you can get a gift of equity when buying from a family member. The gift of equity is a discounted purchase price compared to what the seller could ordinarily receive on the open market. This can be used toward the down payment and/or closing costs on a loan. 

A gift of equity must be given by a family member (blood-related or otherwise). These can’t be used with VA loans.

Gift Money: Is There a Catch? 

Getting gift money doesn’t cost a thing – upfront. 

But gift money – especially money you get from family members – can come with other complications. So, before you accept any gift money, it’s important to have honest conversations with potential donors about the difference between gifts and loans and about who owns the home. 

Gift money is not a loan

A gift is a gift, and a loan is a loan.

If someone is lending you money to help you with your down payment, that’s great! But you have to treat it like any other loan. The money will count as debt when you apply for a mortgage and it could factor into your debt-to-income (DTI) ratio.

If the money is a gift, you’ll need a gift letter from the donor stating that the money is a gift and you don’t have to pay it back.

Decide if a gift makes someone a co-owner 

Providing gift funds does not include any rights of ownership.

If someone gifts you money and expects you to make them co-owner of the home, you need to decide if that will be the case BEFORE you take the money. Trust us, being clear from the jump can potentially save you from a lifetime of awkward family and friend reunions. 

If a potential donor wants to help, but also wants an ownership stake in the home, discuss having them co-sign your mortgage loan. 

Gift Down Payment: How Much Can I Accept? 

Technically, there isn’t a limit, but there are tax implications that you and your donor should be aware of. 

Lifetime gift exemption

Contrary to what you may think, it’s usually the gift-givers that pay taxes on a gift. The IRS applies gift taxes in two ways: a lifetime gift tax and an annual gift tax.

For 2021, the IRS allows individuals to give up to $11.7 million in their lifetime before paying gift taxes.

If a family member gives you a gift of $15,000 or less in a year, they won’t have to file a gift tax return. The IRS only gets involved when gifts go over the annual gift exclusion (which has been set at $15,000 since 2018).

Giving more than $15,000

Keep in mind, that gift applies per person and per year.

Let’s say you and your partner ask your parents, Robin and Sam, for an assist with a down payment.

• Robin can give a $15,000 gift to you AND a $15,000 gift to your partner for a total of $30,000. 
• Sam can also give you a $15,000 gift AND give your partner a $15,000 gift for, that’s right, a total of $30,000.

That’s $60,000 in a year.

And, by the way, that limit resets every year. Robin and Sam can give you $60,000 in December 2021 and another $60,000 in January 2022. That’s $120,000 in the span of 4 weeks.

Limits on Giving: How Much Down Payment Can a Gift Cover?

Now that you know how much money you can potentially receive as a gift, we’ll break down how much of it you can use for a down payment.

Conventional loans

• Primary residence: There is no limit to how much gift money you can apply toward your down payment for a primary residence.
• Second home: If you’re making a down payment of 20% or more on a second home, you can use all of the gift money on the down payment. If you pay less than 20% down, you’ll have to show that at least 5% of the down payment is coming out of your pocket.
• Investment property: Gifts cannot be used to put a down payment on an investment property.

FHA and VA loans

FHA and VA loans offer greater flexibility when it comes to who can give you a gift. Let’s talk about their requirements individually. 

Even though FHA loans are more flexible, there is one requirement for FHA loans you’ll need to be aware of: Gift funds can only be used on primary residences. 

VA loans offer even more flexibility. Since they do not require down payments, they usually have low interest rates, and they have fewer limits on who can gift you money.

Follow the Money: Do You Know How To Document Your Gift?

Documenting your gift is a necessary part of the process. Otherwise, your lender may view the money as a loan, or worse, put a red flag on your file because they can’t verify where the money came from.

Timing your gift to keep your lender chill

If a lender sees large deposits in your bank account within 2 months of applying for a mortgage, they may not view the deposits as “settled funds” and as fully accessible. If they determine that the funds are unsettled, they’re going to ask you about it.

If you can, try and get your gift money deposited at least 60 days before you apply for a mortgage. After that period, your lender will be less stressed about large sums of money showing up in your bank account.

Get a gift letter and provide documentation

A gift letter doesn’t have to be fancy or even drafted by a lawyer, but it must include:

• Donor’s name, address, phone number and relationship to you
• Dollar amount of gift
• Date the funds were transferred
• Your name and the address of the property you’re buying
• Donor’s signature

In addition to the gift letter, you’ll also need to show your lender a paper trail. There are a few ways you can establish the money’s journey from the gift giver’s bank account to yours:

• A donor’s check and the borrower’s deposit slip
• A copy of the donor’s withdrawal slip and the borrower’s deposit slip
• A copy of the donor’s check to the closing agent
• A settlement statement showing receipt of the donor’s check