Everything You Need to Know About Down Payment Gifts

When it comes to home buying, 20% or higher is the standard mortgage down payment size that most lenders would ideally prefer. However, things are much different today than they have been in the past, as FHA loans and other proprietary mortgages often have much lower down payment requirements. In some instances, though, your family may decide to gift you some money towards a down payment. This will work wonders over the life of your loan, as a larger down payment equals less money in interest.

You may want to talk to a financial advisor about a down payment gift before you make on, though.

Who Can Gift Down Payment Funds?

Most commonly, down payment gifts come from close family members such as parents, grandparents, siblings, or children. Mortgage lenders typically prefer that the money come from someone with a clear, personal relationship to the buyer to reduce the risk of repayment expectations. Family gifts are allowed under most loan programs (including conventional, FHA, and VA loans) though documentation proving the relationship and confirming the funds are a true gift is usually required.

In some cases, extended family members (like aunts, uncles, or cousins) may also give down payment funds, depending on the loan program and lender guidelines. FHA loans tend to be more flexible, allowing gifts from a broader range of relatives or individuals with a close personal connection to the borrower. Domestic partners and fiancés can also provide gifts if the relationship is properly documented, which helps lenders verify that the money isn’t a disguised loan.

While less common, friends or non-family members can sometimes give down payment funds under certain loan types. However, lenders often scrutinize these gifts more closely and may require additional documentation to confirm that the funds are not expected to be repaid. The key is transparency, borrowers must disclose the source of the money and provide a signed gift letter confirming that the funds are a genuine gift, not a loan.

Some borrowers may receive down payment assistance from nonprofit organizations, community programs, or even employers. These programs are typically designed to help first-time homebuyers or those in specific professions, such as teachers or healthcare workers. While these sources can be valuable, each program has its own eligibility and documentation requirements, so it’s important to review the details carefully before applying them toward your mortgage.

Restrictions on Down Payment Gifts

How much money you’re eligible to receive as a down payment gift depends on the type of mortgage you’re borrowing. If you’re taking out a standard conventional loan, all of your down payment can be gifted if you’re putting down 20% or more. If you’re putting down less than that, part of the money can be a gift. However, some of it will probably have to come out of your own pocket, with the final split varying based on your loan type.

If you’re taking out an FHA or VA loan, the entire down payment can be gifted unless your credit score is below the minimum threshold of 580. In that scenario, you’d be responsible for paying at least 3.5% of the down payment yourself. Regardless of whether you’re getting a conventional, FHA or VA loan, a down payment gift is only acceptable when the house you’re purchasing will be your primary residence or second home.

Documenting a Down Payment Gift

Lenders require you to provide some detailed documentation any time a down payment gift is changing hands. Specifically, you’ll have to produce a letter which includes the name of the donor, their relationship to you, the date and amount of the gift and a statement that says the money has no expectation of repayment.

Both of you will need to sign the letter and the lender may also require additional documents to back it up. For instance, you might have to show copies of the donor’s bank statements to prove that they’re actually in a position to make a gift or a copy of a deposit slip showing when you place the money into your account.

While there’s no specific time frame on when you can accept a down payment gift, it’s always better to do it sooner rather than later. When you apply for a mortgage, most lenders look at your bank statements from the previous two to three months. If you’ve had a down payment gift sitting in your account for that entire time period, you may not have to jump through extra hoops to document it.

Tax Implications for the Giver of a Down Payment Gift

The IRS imposes a gift tax on certain monetary gifts and this tax is paid by the person donating the money, rather than the one who receives it. As of 2022, you could give up to $16,000 to any one person without incurring the gift tax. If you’re married and file a joint return, you and your spouse can jointly gift up to $32,000 to a child or other family member. There are no restrictions on how many people you can make gifts to each year.

In some cases, both parties can agree to have the person receiving the gift pay the tax. If you’re thinking of going this route, it might be a good idea to crunch the numbers first to find out how it may impact your tax liability when you file.

Bottom Line

Giving down payment funds can be a generous and effective way to help a loved one buy a home, but it comes with important rules. Lenders require clear documentation to prove that the money is a true gift and not a loan that could affect the borrower’s ability to repay their mortgage. Whether the funds come from family, friends or an assistance program, transparency and proper paperwork are key. By following lender guidelines and keeping good records, you can help ensure the gift supports a smooth home purchase and avoids any issues during loan approval.

Financial Planning Tips for New Home Buyers

When you introduce a mortgage into your life, your long-term financial plan may need adjustments. A financial advisor can help you do this. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Before you decide on a home to buy for you and your family, you’ll want to find out exactly what you can afford to spend. Use SmartAsset’s home affordability calculator to start.