What Is Gift Money?

Gifts funds or money, in the mortgage world are monies gifted to a borrower to put towards a home purchase, whether as a down payment or to help fund closing costs.

The keyword is “gift.” The money cannot be borrowed. The lender will require specific documentation and a trail for any funds that are gifted to you.

Why does the bank care how you get the funds?  The reason the funds need to be a gift is the bank does not want you to “borrow” and have to make payments just to get the down payment to purchase a home.  The funds are also meticulously documented to prevent funds from being laundered.

Advantages Of Using Gift Money

Using gift money for a down payment on a home can be a significant boost for many buyers, especially first-time homeowners.

It allows for a larger down payment, potentially leading to better mortgage terms and a reduction in ongoing monthly payments.  Pricing guidelines often offer a lower interest rate for higher down payments.

And, of course the more money you put down the lower your monthly mortgage payment.

Gift Money For A Home Purchase Guidelines

A borrower getting a mortgage that is backed by Fannie Mae, Freddie Mac or the FHA allows 100% of your funds to close can be gift funds from an acceptable donor.  The gift money can be used for your down payment, your buyer closing costs and required reserve funds. Typically there are no gift fund limits.

If you are buying a single-family home or a condominium, many programs will allow 100% of the cash needed to close to be gift funds. Multi-family homes may require 5% of the funds to be your own.

Who Is An Acceptable Donor That Can Provide Gift Funds?

Who is allowed to provide gift money:

• A relative- Mostly as agents, we see gifts come from a parent. But gift funds could come from the borrower’s spouse, child, or from any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship

or

• A partner—A fiance, fiancee, or domestic partner can also provide gift funds for a down payment. Most banks will ask for documentation showing that your partner has lived at the same address for you for one year.

but

• No party providing gift funds must be affiliated with the builder, the seller, the real estate agent, or any other party in the transaction.

With Fannie Mae and Freddie Mac the gift funds can only come from a relative, whether by blood or marriage.

However, the FHA states that the gift can come from a close personal friend with a documented interest in the borrower. Gift funds with an FHA loan can also come from a charitable organization, an employer or union, or a down payment assistance program.

So the FHA is a little more lenient about where the gift is coming from.

Talk With Your Mortgage Broker Recieving Gift Money

It is important that when your mortgage broker asks how much down payment you have available, you differentiate between funds that you have personally saved and cash that is being gifted to you.

To you, it doesn’t make a difference, cash is cash.  But to a bank it does.  They view money you save differently than gift funds.  They will want documentation of who is giving provident the gift and paper trail of where your money is coming from.

There still may be loan programs that require a certain percentage of the down payment to come from your personal savings.  So when you are getting pre-approved for a home loan make sure you broker knows if part of the down payment is being gifted or not.

Getting your first mortgage can be a whirlwind to begin with, and leaving out small details can cause problems later on when it is crunch time.

Sourcing Your Gift Money

Now that you have read this, please don’t just go shuffling your bank accounts and cash around. The banks are very strict about sourcing and documenting your funds. 

Seasoned Funds

If your parents or another approved gift donor has given you gift in advance of a purchase, the easiest thing is to let the gift season in the bank account.  Seasoned funds is money that has sat in the bank account for over two months.

This means you can show two months of bank statements showing the full amount deposited in the bank account. Seasoned funds are considered yours and will not require sourcing, even though they are technically a gift.

Follow The Paper Trail

Not every home buyer has time to season funds, or they will not be moved until a home is actually under contract. So, if you have not seasoned your down payment gift funds, you will have to show the paper trail of where it is coming from and where it ends up.

Document:

1. Gift amount in the donor’s bank account with one or two bank statements showing the funds..
2. A copy of the donor’s check and the borrower’s deposit slip.
3. Bank statement showing the gift funds in the borrower’s account.
4. The donor’s check is stamped showing the the amount has cleared the donor’s account.

Speak with your mortgage originator and understand precisely what the underwriter will be looking for when it comes time to document gift funds. I have only given you an overview, and every underwriter may require different things.

The Gift Funds Letter

Another requirement the underwriter will be looking for is a “Gift Funds Letter” The letter should state:

Gifts must be evidenced by a letter signed by the donor, called a gift letter. Often your mortgage originator will provide a gift letter template.  The gift letter must:

• The amount of the gift
• The transfer date of the funds
• A statement that the money is a gift and no repayment is expected.
• The donor’s full name, address, phone number, and the relationship to the borrower.

Are There Down Payment Gift Funds Tax Consequences?

By no means am I an accountant and do not know the IRS rule on gifting money. If gift money is being used to fund your home purchase, contact your tax professional to see if there are any tax ramifications.

But as I understand it, in 2024, there is an annual gift tax exclusion of $17,000 per person per year without reporting it to the IRS. So, a set of married parents could gift $34,000 to a single child or $68,000 to a married couple and avoid reporting it come tax time.

There is also a tax code that allows for a lifetime gift exclusion. The federal government limit is quite high.  But each state has varying rules.  Again I am no expert and recommend you drop a call to whomever does the donor’s taxes.  If there is a tax burden it usually falls to the donor.

Using Gift Money Alongside Down Payment Assitance

Gift money can also be used alongside downpayment assistance. Check with your agent and originator to see what downpayment assistance programs may be available to you. They can also check to make sure that the loan program you are eligible for allows the two to be used in conjunction.

Massachusetts has great mortgage programs that provide down payment assistance through MassHousing.  Many states also have similar agencies to aid in providing affordable mortgages for low to moderate-income borrowers. 

Summary Of Using Gift Money For To Buy A House

With today’s underwriting guidelines, it is very possible to have a parent or family member give you gift funds to help fund your down payment and closing costs when purchasing a house.

If you are receiving gift funds for your down payment discuss with your mortgage originator immediately.  Most of the loan programs allowing gift funds have very stringent criteria and documentation and you don’t want to run around last minute trying to pull it together.

By all means, consider gift funds as a means of supplementing your down payment for a house purchase