Mortgage Down Payment Gift Rules
Who, What, and Why a Letter is Required

Down payments are one of the biggest hurdles to purchasing a home. If you haven't saved enough of your own funds but you’re ready to buy a home, many lenders allow borrowers to make a down payment with gift funds.   Commonly referred to as a “down payment gift”, these funds are looked at differently and have additional rules.

Receiving gift money for a mortgage down payment is a great way to give you a jump-start when saving for a home. If a parent, sibling, or grandparent offers to gift funds for your home’s down payment, you may not realize that you must disclose this information to your lender. From your perspective, as long as you arrive at closing with enough funds, you should be okay, right? Unfortunately, it's not that simple.  Even though lenders do allow gift funds, they also require you to disclose the source of these funds in the form of documentation.

When applying for a home loan, the lender needs a clear picture of your financial situation. This process known as underwriting includes collecting information about your employment, income, and assets. This is why a lender will ask for copies of your most recent bank statements. The purpose of reviewing your bank statements is to ensure you have enough in reserves for mortgage expenses. But sometimes, a family member offers to pay these expenses as a gift to you.

Depending on the loan, some programs only allow gifted funds from a blood relative, or in some cases, a godparent. Other programs, however, will also allow gifts from a charitable organization or a non-blood relative.


How Much Can Be Gifted?

This is a question that commonly comes up among borrowers who are receiving gift money from their parents for their first home down payment. In most cases, as long as the donor meets the qualifications for your specific loan program, there's no cap on the amount that can be gifted, whether the money is coming from parents, grandparents, or an employer. What can influence the amount gifted is the nature of the mortgage, the borrower’s credit, and subsequently, the down payment amount.

For FHA loans, the total amount of the mortgage down payment can be gifted. Depending on the borrower's credit score, FHA loans will require a minimum of 3.5% down (with a credit score of 580 or more) and 10% down (with a credit score between 570 and 500). While this may shape the amount of the down payment required, the entire amount can still be gifted from an eligible donor.

For conventional loans, so long as you’re investing a minimum of 20% or more as the down payment, all of the funds can come in the form of a gift. However, if your down payment is less than 20%, you’ll then be required to pay a portion of that money from your own pocket. The exact amount you’ll be expected to pay is dictated by the carrier for which you’re buying your private mortgage insurance, which is required for mortgages in which the down payment is less than 20%.


Can a Mortgage Gift Be Repaid?

No. It’s called a mortgage gift for a reason – the gift giver is providing funds to a home buyer with no expectation of being repaid. If the buyer is planning to pay back the funds, that money was loaned not gifted, and then the lender is required to factor that into the debt-to-income ratio. This is to ensure that you can actually afford your mortgage payment. Withholding information about your down payment sources could put your loan qualification at risk, and even more importantly, it’s considered mortgage fraud, which is illegal.


What Happens if You Pay Back a Gifted Down Payment?

Repaying money that was initially documented as a down payment gift is considered mortgage fraud, which is a crime that can result in serious legal ramifications. Mistating gift funds can also put your loan qualification in jeopardy, as all forms of lending need to factor in your debt-to-income ratio.


Gift Letter for Mortgage Down Payment

Before you can use gift funds for your down payment and/or closing costs, you need to submit a gift letter to your lender. This letter provides documentation defining the parties involved and confirms that the funds are indeed a gift.   A down payment gift letter is intended to prove your relationship with the gift giver and that the funds are a gift and repayment isn’t expected. While many lenders will have gift letter templates available, the letter needs to come from the party that is giving you the funds. The contents required in the letter are generally simple and straightforward.


Does a Mortgage Gift Letter Get Reported to the IRS?

According to the IRS gift tax exclusions in 2022, any down payment gift below $16,000 does not have to be reported. Beyond that amount, the funds must be reported on the donor's gift tax return. In turn, parents can collectively give up to $32,000 per child without needing to report those funds to the IRS.

Having availability to GIFT FUNDS can be helpful not only when you’re needing help with your down payment, but also when you’re writing an offer in a competitive market.  It may be just what you need to put you in the winner’s circle.