What is a gift when buying a home?

A gift for home purchasing is a financial contribution from a family member, close friend, or an organization offering down payment assistance. You can use gift funds to cover a portion or all of the down payment and closing costs of buying a home. A gift is a great way to help cover the costs of homeownership, especially if you're struggling to save enough money for a down payment. However, lenders have strict rules for gifts. Avoid problems with the mortgage approval process. Provide clear, complete, and accurate documents, including a gift letter, bank statements, and wire transfer confirmations.

Who can give you a gift to buy a house?

The following donors can give you money to help with the down payment and closing costs: A relative, such as a spouse, child/dependent, or an individual related by blood, marriage, adoption, or legal guardianship Someone with a close personal relationship, like an unmarried partneror anyone co-signing your mortgage An unrelated friend, defined as a former relative, a relative of a domestic partner, or a godparent An organization offering down payment assistance, such as a charitable organization, government agency, or your employer or labor union For example, suppose you intend to purchase a condominium worth $500,000 by providing a down payment of $15,000, equivalent to 3% of the total cost, and obtaining a mortgage loan of $485,000 from a lender. Your parents have kindly offered to assist you by providing the down payment funds. $500,000 purchase price $485,000 loan amount $15,000 gift for the down payment

When are gifts to homebuyers unacceptable?

Gifts are unacceptable in the following situations. A gift cannot be a loan. For funds to be considered a gift, there must be no expected or implied repayment to the donor. If the gift giver expects the homebuyer to repay the funds in the future, it's a loan, not a true gift, and may not be acceptable for mortgage purposes. The donor may not have a financial interest in the property. If the donor is the property seller, the real estate agent, or has any other financial interest in the transaction, the lender may deem the gift funds unacceptable. Lenders consider gifts from these sources as inducements to purchase that may inflate the property's sale price. Can the seller pay the homebuyer's closing costs? You can't use gift funds to buy an investment property. Using a gift for an investment property can be more complicated because the purpose of an investment property differs from that of a primary residence. When you buy an investment property, you typically seek to generate income rather than provide housing for yourself or your family. The donor would have a financial interest in the investment property, raising questions about the true nature of the gift. You must document the source of the gift funds. Gifts are only acceptable if you can adequately verify the source. Cash gifts are typically unacceptable. Lenders require transparency to ensure the funds are legitimate. For example, Joanne's bank statement shows a significant deposit. The lender asked her to provide documents verifying where the money came from. Because her brother gave her cash, she couldn't provide any paperwork. The lender couldn't ensure that the cash gift was from an acceptable source, not from someone with a financial interest in the property, such as the seller or the real estate agent. Therefore, the lender subtracted the large deposit from the funds available for closing.

How to document a gift when buying a home

To document gift funds for a mortgage, the lender will require a gift letter and proof that the donor transferred the gift funds to you. Gift letter A mortgage gift letter summarizes the donor's gift to the home buyer. It includes the following information: The donor's name, relationship to the homebuyer, and contact information. The gift amount. A statement confirming that the gift is not a loan. Transferring gift funds In addition to the signed gift letter, the lender requires proof that the donor transferred the money to your account. Provide copies of the following documents to verify the transfer: The donor's bank statement showing the transfer of gift funds from the donor's account to your account The donor's cashier's check or wire transfer Your bank statement or bank transaction history showing that you received the gift funds When reviewing financial information, mortgage lenders require complete bank statements, including all pages. Many mortgage lenders will accept an account transaction history as an alternative as long as it: Includes all deposits, withdrawals, and account balances Identifies the account holder and the financial institution Shows the last four digits of the account number Covers at least 30 days Some lenders may have additional requirements for documenting gift funds, so checking with the lender to ensure that the documentation meets their specific needs is essential.

How to use a gift to buy a home, step-by-step guide

Using a gift to buy a home involves several steps to ensure the process goes smoothly. Here's a step-by-step guide: Before you start house shopping, get pre-approved for the mortgage to know how much you can afford to spend on a home. Use a local mortgage lender to verify your financial information so you feel confident about buying a home. Next, talk to a mortgage expert to determine if the gift is eligible and what documents the lender needs to approve it. Mortgage lenders require documentation proving the gift is truly a gift, not a loan you need to repay. The documents typically include a gift letter from the donor and proof that the donor transferred the gift funds to you. When you're under contract, provide the documents to the lender. Your donor will send the gift letter to the lender, with a bank statement and a transfer confirmation. After that, send the lender a copy of your bank statement proving you received the gift.

Can the donor transfer gift funds at closing?

The donor can transfer gift funds at closing when you buy the house by wiring the money directly to the closing agent. This is often the easiest way to document the transfer of gift funds from the donor to the buyer. Follow these steps when transferring gift funds at closing: Provide the lender with a copy of the gift letter and the donor's bank statement verifying the source. Wire the gift funds to the title company, or settlement agent handling your closing. The settlement agent applies the gift funds to your purchase and provides the lender with the necessary documents. Transferring gift funds directly to the closing agent is simple and requires fewer documents. Feel free to schedule some time with us so you can ask your questions. Rely on our staff of certified mortgage underwriters to guide you along the path to homeownership, making sure everything goes smoothly.

Do mortgage lenders accept gifts from a different country?

Mortgage lenders typically accept gifts from a different country. However, you'll need to take additional steps to document the gift funds. The gift can't be a loan; it must be from an acceptable donor, and you must provide the lender with the standard documents, such as a gift letter and proof that the donor transferred the money to you. In addition, follow these steps when documenting a gift from a different country: Transfer the fund to a U.S. financial institution. Convert the currency to U.S. dollars. Exchange rates fluctuate, affecting the funds available for the down payment or closing costs. Convert all foreign-origin documents to English , such as wire transfer confirmations and documents confirming the relationship between the donor and the homebuyer. Clear and transparent documentation of the gift transaction is crucial to demonstrate to the lender that the funds are legitimate gifts, not loans.

What are the rules for mortgage gift funds?

The rules for gift funds may vary based on the specific loan program and the lender's requirements. Check with your lender for more information. Meanwhile, on the following websites, you can find gift fund requirements for conventional, FHA, and VA loans. Conventional loans Fannie Mae Conventinal Freddie Mac FHA loan VA loan

Gift Letter | How to use gift funds for buying a home

Q: Can the donor borrow money and give it to the buyer?

Donors may borrow gift funds. However, the person giving you the gift must prove that the money didn't come from the seller or someone with a financial interest in selling the house to you. Donors should have documents showing where they got the money. You can use the gift funds if the donor proves it's from an acceptable source, and you're not responsible for repaying the debt. For example, your parents want to give you $15,000 to help you buy a house. Unfortunately, the money isn't readily available, so they take out a $15,000 loan from a bank and give it to you. In this case, provide the lender with a copy of the loan statement or agreement. The lender will accept the gift as long as your parents are responsible for repayment. Buying a home starts with a mortgage pre-approval. You can get yours today to take advantage of every opportunity to buy the perfect home.

Q: How to document wedding gifts and graduation gifts

You can use wedding, graduation, and similar gifts from unrelated persons towards the down payment on a house. First, deposit the gift funds to your bank account within 90 days of the marriage license or graduation date. Then, provide the lender with the following documents: Your marriage license or certificate A letter explaining the source of the deposits into your bank account Your diploma, transcripts with your graduation date For example, Newlyweds received gifts from friends totaling $8,000, which they deposited into their bank account. They want to use the money towards the down payment on a home. The lender asked the buyers to document the source of the deposits. The couple gave the lender the following documents to document the source of the gift funds: A copy of their marriage license A bank statement showing they deposited the gifts to their bank within 90 days of the wedding A signed letter listing the wedding gifts (You don't need gift letters from your friends.) Marriage or Mortgage: Navigating Home Ownership and Wedding Planning

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This guide explains how to document gift funds for a mortgage and meet lender requirements. Follow these steps to ensure a smooth home-buying process.

What are gift funds when buying a home?

Gift funds are financial contributions from family members, close friends, or organizations. These funds help cover down payments or closing costs for purchasing a home.

Gift funds are a helpful way to reduce upfront costs, but lenders require specific documentation to confirm the funds qualify.

Who can provide gift funds?

Acceptable donors include:

Relatives:

Spouses, children, parents, or anyone related by blood, marriage, adoption, or legal guardianship

Close Friends:

An unmarried partner, mortgage co-signer, former relative, a relative of a domestic partner, or a godparent

Charitable or government organizations:

Nonprofits, employers, or labor unions offering assistance programs

Suppose you intend to purchase a condominium worth $500,000 by providing a down payment of $15,000, equivalent to 3% of the total cost, and obtaining a mortgage loan of $485,000 from a lender. Your parents have kindly offered to assist you by providing the down payment funds.

$500,000 purchase price
$485,000 loan amount
$15,000 gift for the down payment

Unacceptable gift situations

Gift funds are not allowed if:

The gift is a loan:

There can be no repayment agreement, written or implied.

The donor has a financial interest in the property:

Sellers, agents, or others involved in the sale cannot provide gift funds. However, sellers can pay sellers can pay closing costs.

The gift is for an investment property:

Most lenders prohibit gift funds for non-primary residences.

The source is unverified:

Cash gifts or untraceable funds are usually unacceptable.

Joanne's bank statement shows a significant deposit. The lender asked her to provide documents verifying where the money came from. Because her brother gave her cash, she couldn't provide any paperwork.

The lender couldn't ensure that the cash gift was from an acceptable source, not from someone with a financial interest in the property, such as the seller or the real estate agent. Therefore, the lender subtracted the large deposit from the funds available for closing.

How to document gift funds

Lenders require the following:

Gift letter:

A signed document from the donor including:

Donor’s name, relationship, and contact information.
Gift amount.
A statement confirming the funds are a gift, not a loan.

Download the following gift letter template. Then, complete, e-sign, and send it to the lender.

gift letter-1

Proof of transfer:

Clear evidence of the transaction, such as:

Donor’s bank statement showing the withdrawal.
Wire transfer or cashier’s check.
The recipient’s bank statement shows the deposit.

Joanne is buying a home, and her parents gift her $15,000 for the down payment. To meet lender requirements, Joanne provided:

A signed gift letter from her parents.
A complete bank statement from her parents showing the withdrawal.
Proof of transfer via electronic confirmation.
Her bank statement reflects the deposit.

Joanne gave the lender a copy of her most recent bank statement. She included the transaction activity from her online banking account since she deposited the gift funds after the close date of the last statement. The account activity shows all transactions, including the gift funds deposit, from the last statement to the present.

When reviewing financial information, mortgage lenders require complete bank statements, including all pages. Many mortgage lenders will accept an account transaction history as an alternative as long as it:

Includes all deposits, withdrawals, and account balances
Identifies the account holder and the financial institution
Shows the last four digits of the account number
Covers at least 30 days

Step-by-step guide to using gift funds

Get Pre-Approved:

Before house hunting, get pre-approved for a mortgage to determine your budget.

Verify Eligibility:

Confirm with your lender that the gift qualifies and request a list of required documents.

Provide Documentation:

Submit the gift letter, bank statements, and transfer confirmation during the mortgage approval process.

Consider Direct Transfer at Closing:

The donor can wire funds directly to the settlement agent. This minimizes paperwork and ensures a clear transaction.

Questions about gift funds? Schedule a few minutes to talk to a mortgage expert. Ask questions, get straight answers, and find out how to start on your home loan.

Can the donor borrow gift funds?

Donors can borrow gift funds, but they must prove they obtained the money from an acceptable source and are responsible for repaying the loan.

Your parents want to give you $15,000 to help you buy a house. Unfortunately, the money isn't readily available, so they take out a $15,000 loan from a bank and give it to you.

In this case, provide the lender with a copy of the loan statement or agreement. The lender will accept the gift as long as your parents are responsible for repayment.

Buying a home starts with a mortgage pre-approval. You can get yours today to take advantage of every opportunity to buy the perfect home.

Can gift funds pay off debts?

You can use gift funds to pay off debts to qualify for a mortgage if funds come from an acceptable donor. Paying off debt can help reduce your debt-to-income ratio and qualify for a mortgage.

Let's say your parents want to give you some money to help you buy a home. However, you don't qualify for the mortgage because your debt-to-income ratio is too high.

You can use your parent's gift to pay off credit card debts, lower your debt-to-income ratio, and qualify for the mortgage.

Can I use wedding or graduation gift funds?

You can use wedding, graduation, and similar gifts towards the down payment on a house if deposited within 90 days of the event and supported by:

First, deposit the gift funds to your bank account within 90 days of the marriage license or graduation date. Then, provide the lender with the following documents:

A marriage license or graduation certificate.
A letter explaining the source of funds.

Newlyweds received gifts from friends totaling $8,000, which they deposited into their bank account. They want to use the money towards the down payment on a home. The lender asked the buyers to document the source of the deposits.

The couple gave the lender the following documents to document the source of the gift funds:

A copy of their marriage license
A bank statement showing they deposited the gifts to their bank within 90 days of the wedding
A signed letter listing the wedding gifts (You don't need gift letters from your friends.)

Marriage or Mortgage: Navigating Home Ownership and Wedding Planning

See the actual rate and monthly payment upfront on our website. Then, feel confident about buying a home because you know what to expect.

Are gift funds from abroad allowed?

Mortgage lenders accept gifts from different countries with certain conditions.

Transfer the funds to a U.S. bank account.
Provide documentation translated into English.
Convert foreign currencies to U.S. dollars.

Clear and transparent documentation of the gift transaction is crucial to demonstrate to the lender that the funds are legitimate gifts, not loans.

Key gift fund rules by loan type

Gift fund requirements vary by loan type and the lender's requirements. Check with your lender for more information.

Conventional loans: Fannie Mae, Freddie Mac
FHA loans: Page 5-B-10
VA loan: Page 4-25, d. Gift Funds

You can feel confident about making an offer to buy a home. Getting a verified mortgage pre-approval letter signed by one of our underwriters enhances your negotiating power, especially when competing with other buyers.

Feel free to ask a question or leave a comment below.

Purchase JQ

JIM QUIST

President and Founder of NewCastle Home Loans. Jim has been in the mortgage business for 20+ years.

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