Can I Use Gift Money for a Down Payment?

You've found the kind of home you want, and someone who loves you wants to help you get there. Maybe it's a parent, a grandparent, or a sibling offering to help with the money you'll bring to closing. That help is a real gift, and in many cases you can use it toward your Purchase.

The key is doing it the right way. Lenders don't just need to know you have the money. They need to know where it came from and that you don't have to pay it back. Here's how gift funds work, so the help you're given actually makes it to the closing table.

What counts as a gift?

A gift is money given to you with no expectation that you'll repay it. If there's any plan to pay it back, even an informal one, it's a loan, and a loan counts against you as debt. That difference is why lenders ask so many questions about gifts.

Who can give you gift funds?

The rules depend on the type of loan, and each loan program sets its own list. In general:

• Conventional loans usually allow gifts from relatives, such as parents, grandparents, siblings and children, and often from a fiancé or domestic partner.
• FHA loans usually allow gifts from family members, and may also allow gifts from an employer, a labor union, a close friend with a documented relationship, or an approved charitable organization.
• VA and USDA loans also allow gifts, with their own guidelines.

Someone with a financial interest in the sale, such as the seller, the real estate agent or the builder, generally can't give you a gift for your down payment. Help from a seller is handled differently, as a seller credit toward closing costs.

The type of property matters too. Gifts are commonly allowed for a primary residence, while rules for a second home or investment property are stricter. We'll confirm what applies to your loan before you count on the money.

What goes in a gift letter?

Most lenders will ask the person giving the gift to sign a gift letter. It usually includes:

• The donor's name, address, phone number and relationship to you
• The amount of the gift
• The address of the home you're buying, if you have one
• A clear statement that the money is a gift and does not have to be repaid
• The donor's signature and the date

We'll give you the form to use, so you don't have to write one from scratch.

Keep the paper trail clean

This is where most gift questions come from. Lenders need to follow the money from the donor's account to yours, or straight to closing. Here's what helps:

• Move the money in a traceable way. A bank transfer, wire or check works well. Cash is very hard to document, so avoid it.
• Keep the records. Save the transfer confirmation or a copy of the check, along with a bank statement showing the deposit into your account.
• Be ready for a donor statement. Some loans ask for proof that the money came from the donor's own account, such as a bank statement showing the funds before they were sent.
• Ask before you move it. Sometimes it's simpler for the donor to send the gift directly to the closing agent. Talk with us first and we'll tell you which way fits your loan.

If you're gathering the rest of your paperwork too, our guide to mortgage approval documents walks through what's usually needed.

Common gift fund mistakes to avoid

• Depositing cash. Cash deposits often can't be sourced, and then they may not be usable.
• Calling a loan a gift. If you'll be paying it back, tell us. It's better to plan for it than to have it surface during underwriting.
• Moving the money around. Shifting funds between several accounts makes the trail harder to follow.
• Waiting until the last week. Bring up the gift early so it's documented well before your closing date.

What about taxes for the person giving the gift?

Gift tax rules apply to the person giving, not to you, and many family gifts never result in any tax owed. Because everyone's situation is different, the donor should check with a tax professional if they have questions.

Gift funds and other ways to get help

A gift can work alongside other kinds of help. Some Home Buyers combine a family gift with a down payment assistance program or a seller credit toward closing costs. To see if you might qualify for assistance, read Who Qualifies for Down Payment Assistance?

Your next step

If someone wants to help you buy a home, let's talk before the money moves. We'll look at your goals, tell you which loan options accept gift funds for your situation, and walk you and your donor through the gift letter and the paper trail.

Learn more on our Purchase page, compare FHA Loans and Conventional Loans, or call Trust Home Financial at (888) 392-5321. We're Helping Home Buyers find the loan that fits their goals.

Trust Home Financial LLC | NMLS ID # 2567578 | nmlsconsumeraccess.org | Equal Housing Opportunity. Subject to approval. Gift fund rules are set by each loan program and investor and can change. This article is for general information, is not tax or legal advice, and is not a commitment to lend.