Gift funds for a down payment: the rules, the letter, the paper trail

More than a third of first-time buyers get help from family. Lenders allow it — generously — but they must be able to prove the money is a gift, not a loan, and that it came from where you say it did.

Who can give

Conventional (Fannie Mae, Freddie Mac): a relative by blood, marriage, adoption or legal guardianship, a fiancé or domestic partner. FHA: relatives, plus an employer, labor union, close friend with a documented interest, or a charitable or government agency. VA: anyone without an interest in the transaction. The seller, builder, real estate agent or lender may never be the gift donor — their contributions are concessions, handled differently.

How much

For a one-unit primary residence, gifts may cover the entire down payment and closing costs on conventional, FHA and VA loans. Conventional loans on two-to-four unit homes or second homes require a 5% contribution from your own funds when the down payment is below 20%. Investment properties do not allow gifts.

The gift letter

Every program requires a signed letter stating: the donor’s name, address, phone and relationship to you; the dollar amount and the date of transfer; the property address; and a statement that no repayment is expected or implied. Lenders supply a template. A letter that calls the money a “loan” or mentions repayment disqualifies it.

The paper trail

Underwriters verify two things: that the donor had the money (the donor’s bank statement showing the withdrawal, or a copy of the check and their statement) and that it arrived in your account (your statement showing the deposit, or the wire confirmation to the settlement agent). The cleanest route is a wire directly from the donor to the title or escrow company at closing, with the gift letter in the file. Cash gifts — physical currency — cannot be documented and are rejected.

Timing and “seasoning”

Money that has been in your account for two full statement cycles (60 days) is considered your own and needs no gift documentation. A gift deposited last month must be documented as above. Do not move gift money through several accounts; each hop needs a statement.

Frequently asked questions

Does the donor owe gift tax?

Gifts above the annual exclusion (in the high teens of thousands per donor per recipient, adjusted yearly) require the donor to file a gift tax return, but tax is owed only once the lifetime exemption (many millions) is exhausted. Two parents can each give the annual amount to each of two spouses. Consult a tax professional for large gifts.

Can a gift be a loan from family instead?

Yes, but then it is a debt: it must be disclosed, its payment counts in your DTI, and it usually cannot be used for the minimum down payment on conventional loans. Some programs allow documented family loans secured by the property as a “Community Second” — ask the lender.

What about gifts of equity?

When you buy from a relative below market value, the difference can be a “gift of equity” that serves as your down payment. It requires an appraisal, a gift letter, and is allowed on conventional and FHA loans for primary residences.