What Are the Rules for Down Payment Gifts?

Who Can Gift Down Payment Funds?

Lenders usually only allow down payment gifts from specific sources, primarily to ensure the money is legitimate and comes from reliable relationships. Acceptable sources include:

Parents
Grandparents
Siblings
Spouse
Domestic partner
Significant other (if you’re engaged)

These relationships indicate to lenders that you have a strong financial support system, reducing their risk.

Restrictions on Down Payment Gifts

The amount you can receive as a down payment gift depends on your mortgage type:

Conventional Loans: If you’re putting down 20% or more, the entire down payment can be a gift. For down payments less than 20%, part of the money must come from your own funds, with the exact amount varying by lender.
FHA and VA Loans: The entire down payment can typically be gifted unless your credit score is below 580, in which case you must contribute at least 3.5% of the down payment yourself.

Gifts are only acceptable if the property will be your primary residence or second home.

Documenting a Down Payment Gift

When receiving a down payment gift, you must provide detailed documentation to your lender, including:

A gift letter containing:
Donor’s name
Relationship to you
Date and amount of the gift
A statement confirming no repayment is expected
Signatures from both the donor and recipient

Lenders may also request additional documents such as the donor’s bank statements to verify their ability to gift the money or a deposit slip showing the money’s transfer into your account.

It’s advisable to accept down payment gifts well in advance of applying for a mortgage. Lenders typically review bank statements from the past two to three months, and having the gift funds in your account for this period can simplify the documentation process.

Tax Implications for the Giver of a Down Payment Gift

The IRS imposes a gift tax on certain monetary gifts, which is paid by the donor. As of 2022, individuals can gift up to $16,000 per person annually without incurring the gift tax. Married couples filing jointly can gift up to $32,000 per person. There is no limit on the number of people to whom you can give gifts each year.

In some cases, the donor and recipient can agree that the recipient will pay the gift tax. However, it’s crucial to calculate the potential tax impact before proceeding.

Bottom Line

Receiving a down payment gift from family can be a significant financial boost, but it comes with certain rules and documentation requirements. Donors must consider the tax implications, and recipients need to ensure all paperwork is correctly filed to avoid issues with their lender.

Financial Planning Tips for New Home Buyers

Introducing a mortgage into your life often requires adjustments to your long-term financial plan. A financial advisor can assist you in navigating these changes. Square One Planning’s free tool matches you with up to three vetted financial advisors in your area, allowing you to interview your matches at no cost. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Before deciding on a home, determine your budget using Square One Planning’s home affordability calculator. This tool can help you understand what you can afford, making your home buying journey smoother.