In this article, I'll show you the best way to prove that your gift is from an acceptable donor so that everything goes smoothly with your home purchase.
Feel free to download the gift letter for a mortgage template and use it when buying a home.
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 associated with 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. To avoid problems with the mortgage approval process, provide the lender with 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 family member, including your spouse, a dependent, or a blood relative
- Someone with a close personal relationship, like your partner, a close friend, or anyone co-signing your mortgage
- An organization offering down payment assistance, such as a charitable organization, government agency, or your employer or labor union.
Let's say you plan to buy a $500,000 condo by making a $15,000 down payment, which is 3% of the purchase price, and borrowing $485,000 from a mortgage lender. Your parents agree to help by giving you the down payment money.
- $500,000 purchase price
- $485,000 loan amount
- $15,000 gift for the down payment
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.
When are gifts to homebuyers unacceptable?
Gift funds are unacceptable when:
The gift is a loan. For funds to be considered a gift, there must be no expected or implied repayment to the donor.
The donor has a financial interest in the property. If the donor is a seller, 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.
You are buying an investment property. The donor would have a financial interest in an investment property because you're buying it for financial gain, not personal use.
The gift is undocumented. You can only use gift funds to buy a house if the lender can trace and verify the source of the funds.
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.
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.
Download the following gift letter template. Then complete, e-sign, and send it to the lender.
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 proving you received the gift funds
Help the lender comply with anti-money laundering laws by providing accurate documents. For example, your bank statements must identify the financial institution, and the account holder, including at least the last four digits of the account number, withdrawal and deposit transactions, and the ending account balance.
Some lenders may have additional requirements for documenting gift funds, so it is essential to check with the lender to ensure that the documentation meets their specific needs.
How to use a gift to buy a home, step-by-step guide
Before you start house shopping, get pre-approved for the mortgage so you 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.
Then, after you find a home you want and the seller accepts your offer to buy it, provide the documents to the lender. The donor completes the gift letter and sends it to the lender, along with copies of the bank statement verifying the source of the gift funds and a wire transfer confirmation. After that, send the lender a copy of your bank statement proving that 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:
- Before closing, give the lender a copy of the gift letter and the donor's bank statement verifying the source of the gift.
- Wire the donor's gift funds directly to the settlement agent handling your closing. The settlement agent is usually a title company.
- 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.
Can the donor borrow money and give it to the buyer?
Donors may borrow gift funds, as long as the money isn't from the seller or someone with a financial interest in selling the house to you. Be prepared to give the lender documents verifying that the donor borrowed the money from an acceptable source.
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. The lender will accept the gift as long as the donor is responsible for repayment.
Buying a home starts with a mortgage pre-approval. Get yours today, so you're ready to take advantage of every opportunity to purchase the perfect home.
Can you use a gift to pay off debts to qualify for the mortgage?
You can use gift funds to pay off debts to qualify for a mortgage when the gift is from an acceptable source, like a family member. Paying off higher-interest-rate credit card debt is sometimes the best way to use gift funds.
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. Your parents agree to this plan and complete a gift letter to show that the funds were a gift, not a loan to you.
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:
- A letter explaining the source of the deposits into your bank account
- Your marriage license or certificate
- Your diploma, transcripts with your graduation date
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:
- A signed letter explaining that the money is from several wedding gifts (You don't need gift letters from your friends in this case.)
- A copy of your marriage license
See the actual rate and monthly payment upfront on our website. Then, feel confident in buying a home because you know what to expect.
How do you document a gift from outside the U.S.?
Lenders accept gift funds originating outside the U.S. Like any gift, it must be from an acceptable donor, it can't be a loan, 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 to document gift funds originated from outside the U.S.:
- Transfer the fund to a U.S. financial institution.
- Convert the currency to U.S. dollars.
- Convert all foreign-origin documents to English, such as wire transfer confirmations and documents confirming the relationship between the donor and the homebuyer.
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 additional find gift fund requirements for conventional, FHA, and VA loans.
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.