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Use gift money when buying a house

Gift Funds for Down Payment and Closing Costs

Gift funds are sometimes a very misunderstood closing costs solution.

Receiving gift money is sometimes the only way that first-time home buyers can afford to buy a house.

There are three very important things that you need to keep in mind when considering gift funds:

  • It must come from a Relative that is related to you through blood or marriage
  • It must be accompanied by a Gift Letter – See below for Gift Letter requirements
  • It must be sourced and seasoned if received within 60 days of you applying for a mortgage

How to Write a Gift Letter

When receiving a gift, it must be accompanied by a letter that includes all of the following information.

  1. The dollar amount
  2. Name of donor
  3. The donor’s signature
  4. Address
  5. Telephone number
  6. Relationship to the borrower
  7. The borrower must be named
  8. The borrower’s signature(s)
  9. The letter must state that no repayment is required
  10. Include language asserting that the funds were not made available to the donor from any person or entity with an interest in selling the property.

Most loan officers and lenders will have a copy of a gift letter that you can use as a template.

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Transferring Gift Funds

Sourced means that you have to prove that the giver of the money had the money to give.  Seasoned means that either you or the giver of the gift must have had that money for over 60 days – the deposit cannot show up on the most recent two bank statements, or it will raise questions and require a paper trail.

Simply put, the person that gave you the money has to submit bank statements showing that they had the money available to give as a gift.  This can be an inconvenience at the very least to the person that was so kind to try to help you out.

If your parents or a relative gave you money for the purchase of a home longer than 60 days ago (the deposit does not show up on the last two months’ bank statements), then this money is not considered by the lender to be a “gift” for the purposes of purchasing this home.

It more often than not causes confusion and reluctance on the gift giver’s part to produce the required documentation and can be an uncomfortable situation to find yourself in.

Hopefully, you’re reading this before this has become a problem! If your relative is planning on giving you the money at the close of escrow, there is an easy and a hard way to do this.

NOTE: Gift Funds should be WIRED into ESCROW at the time of close.  This is by far the most simple method.

If you have the money deposited into your account and it shows up in your bank statements for the two months before your purchase, you’re looking at a rather invasive production of bank statements and paper trail documents from both you and the relative giving the gift.

Wiring funds from the Gift giver to the Escrow company is the absolute most effective way to receive gift funds. Gift Funds are often limited as to the amount that can be applied toward your Down Payment but is not limited typically when being applied to closing costs for the purchase.

The Relative giving the gift should also be aware of possible tax liabilities of giving gift funds.  Here are Frequently Asked Questions on Gift Taxes from the IRS that you should review and provide to the person offering you the gift.

Gift Money For Closing Costs

Once gift money has been received, it can be used in any aspect of the transaction, including

  • Closing costs – Gift funds can be used to buy discount points or pay most other closing costs of your loan
  • Down payment – Gifted money can be used to pay your down payment
  • Earnest Money – Gift money can also be used for earnest money, though it will need to be in your account and spendable at the time you make the initial offer

Loan Program Policies Regarding Gift Funds

Note: This is a summary of the policies each type of loan uses regarding gift funds. Each of them has specific details that cannot be included here. Talk with your lender about the specific and latest policies for gift funds for the type of loan you seek. 

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FHA Gift Funds Policy

  • A gift letter is required, stating the contact information for the gift giver and their relationship to the borrower, the dollar amount of the gift, and that no repayment is required
  • Gift funds can only come from a relative, the borrower’s employer or labor union, a close friend, a charitable organization, or a government agency. (Note, if gift funds are coming to you from any source other than a family member, you will want to do more research as there are technical requirements for all these other sources)
  • Gifts cannot come from the seller of the property (that’s called a gift of equity) – those will be considered seller concessions and will be handled differently in the application and closing process
  • Gift money cannot be used to pay down other consumer loans to improve the borrower’s credit condition unless it came from a family member 

VA Gift Funds Policy

  • A gift letter is required, stating the contact information for the gift giver and their relationship to the borrower, the dollar amount of the gift, and that no repayment is required.
  • A gift cannot come from a donor that has any relationship with the builder, developer, real estate agent, or any other interested party in the transaction
  • Gifts cannot come from the seller of the property (called a gift of equity) – those will be considered seller concessions and will be handled differently in the application and closing process
  • The lender must verify receipt of the gift (the money is in their account)
  • Gifts cannot be used to pay off other debts to make their credit situation look better without further consideration by the lender
  • The gift-giver will be required to show evidence that the funds came from their bank account and not from some other source by providing bank statements for several months prior to giving the gift
  • The gift cannot be cash. It must be a check or wire transfer into your account

Fannie Mae Gift Funds – Conventional Loans

  • A gift letter is required, stating the contact information for the gift giver and their relationship to the borrower, the dollar amount of the gift, and that no repayment is required.
  • Gift givers can be provided by a relative, a fiance, or a domestic partner. 
  • If the gift comes from a relative or domestic partner and it will be pooled with the borrower’s funds to make up the minimum down payment, the gift letter must state that they have lived together for the past 12 months, and that they will continue to live together in the new residence, and it must include evidence that they have lived together (driver’s license, bill or bank statement showing the same address) for the last 12 months
  • The lender must verify receipt of the gift (the money is in their account)
  • Gifts cannot come from the seller of the property (called a gift of equity) – those will be considered seller concessions and will be handled differently in the application and closing process
  • A gift cannot come from a donor that has any relationship to the builder, developer, real estate agent, or any other interested party in the transaction
  • Gifts are not allowed on investment properties

Freddie Mac Gift Funds – Conventional Loans

  • A gift letter is required, stating the contact information for the gift giver and their relationship to the borrower, the dollar amount of the gift, and that no repayment is required
  • The lender must verify receipt of the gift (the money is in their account)
  • Gifts cannot come from the seller of the property (called a gift of equity) – those will be considered seller concessions and will be handled differently in the application and closing process
  • Gift funds received as a wedding gift must be deposited in their account within 90 days of the wedding
  • A gift cannot come from a donor that has any relationship with the builder, developer, real estate agent, or any other interested party in the transaction
  • If the gift comes from a charitable organization or an agency, they (the agency) must prove that they have an established gift or grant program

Creative Closing Costs Solutions

If you can get Gift Funds to help with your closing costs, consider using this money to either pay the Upfront Mortgage Insurance Premium (for FHA loans) or to buy down the interest rate to permanently reduce your mortgage payments and save thousands of dollars of interest over the term of the loan.

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Any time you have the opportunity to pay higher closing costs to reduce the interest rate or to keep from “rolling in” costs into the loan amount, you stand to save thousands more than the initial cost of paying the cost upfront. This is a simple fact that most lenders do not share because of the fear of scaring you away with higher closing costs.

If you are educated on all of your options, you have the ability to be empowered to make an informed decision about how you would like to structure the financing of your new home.

This is not a decision that a lender should be making for you without even consulting you first. At least that’s my two cents.  Do you have any experiences or input that you can share?

Have Questions About Using Gift Funds for Down Payment or Closing Costs?

We can help! You can Ask Your Question here, and we will connect you with a Mortgage Expert in your area that can help, or you can find a Mortgage Expert Near You below this article.

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Rae Kobe says:

    Perry,
    I bought a house for my daughter in 2016 because new job and not enough funds for down pymt. etc for her to qualify at the time. She has been living there since, and we are finally ready to get it in her name, there is plenty of equity for me to get back the large down pymt, closing cost etc I have invested. So I’m able to sale it to her for about 10k more then we paid, but it’s worth about 100k more now. I don’t want her to have any out of pocket expense so my plan was to pay for closing and gift her 10k at closing from the equity for down pymt etc.? I’m hoping I can do it that way? I’m the seller gifting her the money at closing and her Mom. They sent me a gift letter and now are asking for Doc. of proof etc.
    Thank you
    Rae

    • Scott Schang says:

      Hi Rae, you can certainly “sell” the home to her, but a much easier way would be to simply to add her to the title to the home, then after 6 months, she can do a refinance and take the cash out to pay you back. This is the least expensive and easiest way to do this. Your daughter needs to make the mortgage payments from her checking account for at least 6 months to take the cash out.

      If you have any questions, or if you would like me to introduce you to a mortgage expert that I know and trust, shoot me an email to scott@findmywayhome.com, and please let me know what State the property is in.

      I hope this helps?