Rules for Using Gift Funds as Down Payment for a House


If you meet the lending requirements for a VA or USDA home loan, you may be able to purchase a house with zero down. Conventional and FHA mortgages, on the other hand, do require a down payment of 5% and 3.5%, respectively. A down payment is one of the biggest roadblocks to homeownership. The good news is that mortgage lenders recognize this challenge and they allow borrowers to use gift funds as down payment for a house. There are, however, specific rules with using gift money.

1. The Gift Must Come From a Family Member

When your mortgage application goes through underwriting, the underwriter will ask about the source of your down payment funds. And while banks do allow borrowers to use gift funds as down payment, they don’t allow all gifts. Some mortgage lenders only allow gifts from a family member, such as a parent, a grandparent or a sibling. Other lenders are more flexible and allow gift funds from a non-relative, such as a friend or godparent. However, the lender will inquire about your relationship with the giver. If you can provide an explanation or proof of a close relationship, the lender may approve the giver.

2. Gift Funds Cannot Be a Loan

Banks do not allow applicants to borrow funds for their down payment. If you’re using financial gifts from a family member or an approved non-relative, the giver must sign a letter stating that funds are in fact a gift, and not a loan. The gift letter includes information such as the giver’s name, address and phone number, their relationship to the borrower, and the exact amount of the gift. Some banks provide the letter, whereas others accept a notarized letter from the giver. Additionally, the giver must provide the lender with copies of their bank statements as proof of their ability to gift a down payment.

3. Gift Fund Limitations

 There also rules regarding how much a giver can gift towards your down payment. Both FHA and conventional loans allow gift funds for down payments. With a conventional loan, gift funds can pay the entire down payment if you’re putting down 20% or more. If you put down less than 20%, you will have to contribute some of your own funds. The minimum contribution varies by lender. In the case of an FHA loan, gift funds can cover 100% of your down payment. But if you have a low credit score between 580 and 619, you’ll have to pay at least 3.5% of the down payment from your own funds.