What Is a Down Payment Gift?

A down payment gift is money given by someone, usually a family member, to a homebuyer to help them afford a mortgage down payment or similar expenses like closing costs. To use gift money, you have to follow the rules imposed by the lender and/or government agency insuring the loan, if applicable.

Down Payment Rules by Loan Type

Down payment gift rules vary by mortgage type. Here’s what you need to know if you plan to buy a home with gifted funds or help a loved one buy a home.

Conventional Loan Down Payment Gift Rules

With conventional loans, lenders usually allow gift money for some or all of your down payment, closing costs, and financial reserves you’ll use to pay the mortgage. Acceptable sources are limited to family members and romantic partners, and gift funds can’t be used on investment properties.

FHA Loan Down Payment Gift Rules

FHA loans accept gift money for down payments, closing costs, or reserves you’ll use to pay the mortgage. It can come from a wider variety of sources than conventional loans, including family members, close friends, employers, labor unions, charitable organizations, and government agencies.

VA Loan Down Payment Gift Rules

VA loans help eligible military-connected home buyers purchase a primary residence. These loans do not require down payments, but you can put money down if you want to start off with equity. Gift funds can be used toward an optional down payment or your closing costs.

USDA Loan Down Payment Gift Rules

USDA loans are intended for low-income individuals living in suburban or rural areas, and they have no down payment requirement. Gift money for USDA loans can cover the loan’s closing costs but cannot count as financial reserves.

How to Document a Down Payment Gift

In the mortgage application process, lenders want an accurate picture of your financial situation, including your assets and debts. You’re required to disclose on your application if you’re putting gift money toward any part of the loan. Lenders also require you to submit a gift letter.

Alternatives to Down Payment Gifts

If down payment gifting rules sound too onerous, there are other ways to buy a house with minimal savings, including:

Government-Backed Mortgages

One of the perks of government-backed mortgages is their low (or no) down payment requirements. VA and USDA loans require no down payment at all, and FHA loans require as little as 3.5% down.

Zero Down Payment Loans

Besides VA and USDA loans, there aren’t many zero down payment options, but it’s worth checking your eligibility for local and national down payment assistance programs.

Explore Other Low Down Payment Options

Some conventional loans now offer very low down payments; for example, Wells Fargo has a conventional loan program for first-time homebuyers with as low as 3% down.

Save More

Consider holding off on homebuying until you’ve saved more for a down payment so it’s easier to get a mortgage. With savings interest rates the highest they’ve been in years, you’ll make faster progress when saving for a down payment.

FAQs

Can You Pay Back a Mortgage Gift?

No, a down payment gift must be a true gift, not a loan. The donor must provide a gift letter stating that repayment is not expected.

What Is a Gift Letter?

A gift letter is a document that includes the donor’s contact information, relationship to the borrower, the amount of the gift, and a statement that repayment is not required.

Who Can Gift Money for a Down Payment?

The acceptable sources of gift money vary by loan type but generally include family members, close friends, employers, labor unions, charitable organizations, and government agencies.

Is Down Payment Gift Money Taxed?

Gift money is not taxed for the recipient, but the donor may be subject to gift tax rules if the amount exceeds the annual exclusion limit set by the IRS.

Is Your Credit Mortgage-Ready?

Remember that your down payment and bank balance are only part of the mortgage approval process. Your credit report is closely scrutinized by lenders for insight into your payment history, debt load, and loan experience. The better your credit score, the more likely you’ll be approved—and land lower interest rates and fees.

Contact O1ne Mortgage for Expert Mortgage Services

At O1ne Mortgage, we understand the complexities of securing a mortgage and are here to help you every step of the way. Whether you need assistance with down payment gifts or exploring alternative options, our team of experts is ready to guide you. Call us today at 213-732-3074 for any mortgage service needs. Let us help you achieve your homeownership dreams!