How to Use a Down Payment Gift when Purchasing a Home

January 11, 2021 | 2 min read | The mortgage process
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If you are purchasing a home but do not have enough money for a down payment, you may benefit from a down payment gift! Cash gifts, also referred to as down payment gifts are popular among many first-time homebuyers. The following outlines the rules and guidelines a borrower must follow when using a cash gift for a down payment.

Who Can Gift Money for a Mortgage Down Payment?

Typically, the gift must come from a relative or close friend. However, some mortgage companies may only allow gifts from blood relatives, while others may allow gifts from godparents or close friends.

Who is Not Eligible to Gift Money?

In most cases, anyone who has a vested interest in the home, such as a seller, general contractor, or real estate agent, may not gift money for a down payment. 

What are the Limits on a Down Payment Gift?

The giftable amount depends on the loan program and the mortgage company’s guidelines. In most cases, someone can gift the total amount of the down payment. For example, if you are purchasing a home worth $100,000 and need to put down a 20% down payment, you may be eligible to receive a gift of $20,000. 

Contact us to learn more about how the gift limits may vary by loan program. 

What is a Down Payment Gift Letter and Why is it Required?

If you receive a down payment gift from a relative or friend, the donor is required to provide the mortgage company with a gift letter. This gift letter states that the cash donor does not expect you to pay back the money. The letter may also include the following information: 

  • Your name and the donor’s name
  • The dollar amount of the gift
  • Your relationship with the donor (i.e., daughter, cousin, friend)
  • A statement explaining that borrower will not repay the gift funds
  • The address of the subject property
  • A statement describing where the gift money is coming from (an investment account, checking account, savings account, etc.)
    • The donor may also be required to provide proof of the transfer of funds (copy of a recent bank statement or show evidence that the funds went from one account to another) 
  • The donor’s signature

What are the Other Mortgage Down Payment Gift Rules?

After the loan originator reviews the gift letter, they will examine both the borrower and the donor’s accounts to see where the gift money is coming from and going (such as large deposits and large transfers). It is essential always to keep a paper trail and record of everything associated with the gift funds.  

Also, after you receive the gift money and provide a gift letter, your loan originator will re-review your bank accounts to ensure that all the funds used to qualify you for the loan is, in fact, your money. If there are any discrepancies, you may be required to provide a letter of explanation. 

What if a Down Payment Gift is Not an Option?

If you cannot receive a down payment gift but still want to buy a home, you may want to start focusing on creating a down payment savings plan. It is always best to speak with a mortgage specialist to inquire about some lower down payment programs.