Rules for Using Gift Funds for a Down Payment on a House
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Richard Haddad Executive EditorRichard Haddad is the executive editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
Buying your first home is a huge milestone, but coming up with a down payment can feel like a major hurdle. Many first-time buyers use gift funds for a down payment, especially younger home shoppers.
Before you accept a generous contribution from family or friends, there are some rules to follow — depending on your loan type. Understanding these rules upfront will help you avoid roadblocks and keep your home sale on the up and up.
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What are gift funds for a down payment?
Gift funds for a down payment are financial contributions from family members or close friends intended to help you cover the upfront costs of purchasing a home. This money isn’t a loan and shouldn’t need to be repaid, which makes it different from other financial assistance.
However, lenders want to be sure this money is indeed a gift and not an undisclosed loan. As a result, specific documentation and rules apply when using gift funds for a down payment.
Where do most buyers get their down payment funds?
According to data collected by the National Association of Realtors (NAR), here are the most common sources homebuyers use for their down payments:
- From personal savings: 54%
- Proceeds from the sale of a primary residence: 37%
- Gift from a relative or friend (all buyers): 9%
- Gift from a relative or friend (buyers ages 25 to 43): 34%
Not surprisingly, the percentage of homebuyers relying on gift funds for a down payment increases substantially in younger home shoppers.
Gift money down payment rules by loan type
Lenders have several requirements for gift funds based on the type of loan you’re using. Below, we’ll break down the general rules by loan type to help you understand what’s expected when you purchase a primary residence home.
Conventional loans
A conventional loan is a private mortgage that is not backed by the federal government. Last year, 73% of new single-family homes sold were purchased using conventional financing.
Most conventional mortgage loans will allow homebuyers to use gift money for a down payment and closing costs, but the gift funds must come from an acceptable donor source. Fannie Mae and Freddie Mac require acceptable gift fund donors to fit into one of the following criteria:
- A relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship
- A non-relative that shares a familial relationship with the borrower defined as a domestic partner (or relative of the domestic partner), individual engaged to marry the borrower, former relative, or godparent.
When using gifted funds for your down payment, you’ll also need to provide what’s known as a “gift letter” from the donor stating that the money does not need to be repaid. (More on this later in our post.) Some lenders may also require copies of bank statements showing the transfer of funds between the donor and you.
Donor restriction: In addition to the family member requirements, the donor cannot be — or have affiliation with — the home builder, developer, a connected real estate agent, or any party who may have a vested interest in the home sale transaction.
FHA loans
FHA loans are mortgage loans that are backed by the Federal Housing Administration and must be issued by an FHA-approved lender. FHA lenders typically serve borrowers with low-to-moderate income levels.
With an FHA loan, you can use gift funds for the entire down payment, regardless of how much you’re putting down. The donor can be a family member, close friend, your employer, labor union, or charitable organization, and you’ll need a gift letter. The FHA also requires you to verify the transfer of funds into your account, typically through a bank statement.
VA loans
VA loans allow veterans and service members to use gift funds for a down payment, even though no down payment is usually required. The rules are flexible as long as the gift doesn’t come from someone with a financial interest in the sale (such as the seller or real estate agent). You’ll still need a gift letter to document the contribution.
Gift funds can also be used to pay VA funding fees or closing costs. Again, you will need documentation of the money transfer.
USDA loans
USDA loans, like VA loans, typically don’t require a down payment. However, if you decide to put money down or cover other closing costs, gift funds are permitted. Gifted money will not be permitted to count as qualifying funds for required financial reserves.
As with other loans, the funds must come from a family member or someone with a close relationship with you who doesn’t have an interest in the sale. A gift letter and documentation of the transfer will be required.
What is a gift letter?
A gift letter is a document that certifies the funds you’re receiving for your down payment are a gift, not a loan. Lenders require this letter to ensure the money doesn’t need to be repaid, which could affect your ability to afford the home.
The letter must include the donor’s name, contact information, relationship to you, the gift amount, and a statement that the funds are a gift with no repayment required. You can see an example gift letter at this link.
Both you and the donor will need to sign the letter, and your lender may ask for additional documentation to verify the transfer of funds.
How much down payment should you plan for?
According to real estate data provider ATTOM, the current median down payment on a house in the U.S. is $64,000, or about 16.6% (based on a median home sales price of $385,000).
Data from the National Association of Realtors (NAR) reports a similar median down payment estimate of 15% for all buyers. However, NAR cites first-time homebuyers typically come in with smaller down payments of about 8%.
To give you a clearer picture of what to expect, here’s a breakdown of down payments for various home values and percentages:
Down payment guide
| Home price | 5% down | 10% down | 15% down | 20% down |
| $300,000 | $15,000 | $30,000 | $45,000 | $60,000 |
| $400,000 | $20,000 | $40,000 | $60,000 | $80,000 |
| $500,000 | $25,000 | $50,000 | $75,000 | $100,000 |
| $600,000 | $30,000 | $60,000 | $90,000 | $120,000 |
| $700,000 | $35,000 | $70,000 | $105,000 | $140,000 |
| $800,000 | $40,000 | $80,000 | $120,000 | $160,000 |
| $900,000 | $45,000 | $90,000 | $135,000 | $180,000 |
| $1,000,000 | $50,000 | $100,000 | $150,000 | $200,000 |
| $1,500,000 | $75,000 | $150,000 | $225,000 | $300,000 |
Vet the donor’s interests
Before accepting gift funds, it’s important to have a clear conversation with the donor about their motivations and expectations. While gift money is typically given with the best intentions, it’s crucial to ensure that the donor understands the implications and has no hidden expectations.
For example, you’ll want to confirm that the donor doesn’t expect repayment or any form of control over the property. If the donor might face financial hardship as a result of giving you the money, it’s wise to discuss alternatives. Additionally, make sure they’re aware of any tax implications that could arise.
What donors should know
Here are some other things donors should keep in mind:
- Select a gifting method: Decide whether to transfer the gift directly to the recipient or to the escrow account handling the home purchase. Escrow accounts can provide added documentation for lenders.
- Sign a gift letter: Donors must sign a gift letter that certifies the funds are a gift, not a loan. This is required by most lenders.
- May need to report the gift on your taxes: In 2024, a donor can gift up to $18,000 ($36,000 for a married couple) to each recipient without incurring a gift tax liability. Larger amounts may need to be reported to the IRS and could trigger a gift tax.
- Keep documentation: To avoid any issues with the lender or the IRS, donors should keep clear records of the transfer, including receipts, bank statements, and a copy of the gift letter.
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Alternatives to using down payment gift funds
If gift funds aren’t an option or don’t cover the full amount you need, there are other ways to secure your down payment:
- Personal savings: Building up your savings over time is the most straightforward way to cover a down payment.
- Down payment assistance programs: Many state and local governments offer assistance programs for first-time homebuyers. These may provide grants or low-interest loans to help cover the cost.
- 401(k) or retirement loan: Some buyers use funds from their retirement accounts to cover down payments. Be cautious, though, as this could affect your future financial security.
- Sell assets: Selling assets like a car, collectibles, or investments can help raise funds for a down payment.
Get started with a top agent today
Navigating the homebuying process, including managing down payment gift funds, can be complex. A top real estate agent can provide valuable insights, guide you through the paperwork, and ensure you’re meeting all lender requirements. Whether you’re buying your first home or making a move, having expert advice on your side makes a big difference.
Ready to get started? HomeLight’s free Agent Match platform can connect you with a top agent who understands your unique needs. We analyze over 27 million transactions and thousands of reviews to find the right expert to help you complete your homebuying journey.
If you’re buying and selling a home at the same time, check out HomeLight’s innovative Buy Before You Sell program, which provides a streamlined, simplified, and more certain process.
Header Image Source: (robertcrum/ Depositphotos)
- "Highlights From the Profile of Home Buyers and Sellers", National Association of REALTORS® (November 2023)
- "U.S. Real Estate & Property Data", ATTOM (September 2024)
- "Housing Data Show Median Price Per Square Foot by Region", U.S. Census Bureau (June 2024)
- "2024 Home Buyers and Sellers Generational Trends Report", National Association of REALTORS® (April 2024)
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