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Using Gift Money for a Down Payment: What You Need to Know

Writer's picture: Amanda Martin & Ying HeAmanda Martin & Ying He

Updated: Nov 11, 2024


Buying a house is not only an emotional milestone for a person, but it is also likely one of the greatest financial investments that many people make. Getting gift money for your down payment from a family member is one good avenue toward lowering the down payment amount. But when using gift money, especially to pay for some or most of the down payment for mortgage financing, there are guidelines and rules surrounding it. This will take you through the important facts surrounding the use of gift funds, all the way from eligibility to documentation, to make sure that it all goes smoothly.


Who Can Give Gift Money?

The most popular rule concerning gifting money for a down payment is that the recipient must have relatives give the money. It doesn't have to be your immediate family - your parents, for instance - but the donor needs to have a familial blood or marriage connection, so that would mean grandparents, for instance. Curiously, a fiancé would be considered an acceptable donor, even though you are not yet married. Gifts from friends or those who don't share a blood or marital relationship are usually excluded by lenders. This is to avoid cases in which the gift may present a loan, which would oblige the borrower to pay for this money back, and increase their liabilities. 


The Significance of a Gift Letter

The giver must also provide a gift letter. A gift letter is an official letter that specifies the amount given, the nature of the relationship between the giver and receiver, and most importantly, that the money is a gift and not a loan.


The lender requires this letter as part of his/her approval process of the mortgage.


Most lenders will give you a standard form for the gift letter, and this makes it easy for both the donor and borrower to meet the requirements. On a gift letter, details should be included such as the address of the property and loan number. Typically, some of these details may not be available when a person starts the home-buying process; therefore coordination with your lender is essential.


Preparing the Gift

And the best way to use gift money is to start with a clear plan of what to do. One must decide how much would be put down, and costs to close this purchase and then other needed expenses for closing this purchase. Coordination is key because the gift amount may change based on the price of the home.


This may be the scenario where you will be making a 20% down payment on a $600,000 house, and that your parents are funding the whole 20%. They might not be willing to put $120,000 in your account some months in advance. They would perhaps wish to keep their assets invested or earning interest until the purchase is finalized.


Gift Cash Movement

The smoothest way of handing over gift money is to send it directly to the title company during the closing process. This way, the donor would still have control of his assets up to the very last step of the transaction. It also avoids any required exposure of personal financial information because it keeps the funds in their own account until needed.


Lenders like receiving proof of funds at the offer stage to ascertain that the buyer will satisfy the down payment requirements. If part of the down payment is gift money, some lenders want to view a printout of the donor's bank account with personal details such as account numbers and addresses blackened out.


Proof of Funds and Competitive Markets

Usually, there are multiple offers in a competitive real estate market, resulting in sellers expecting solid assurance that the buyer has the needed funds to close the deal. Proof of funds is therefore crucial in such cases. The document proving the buyer has sufficient money for the down payment is simply called proof of funds and can be a bank account statement with the account number blacked out. 


However, if gift money is included in the down payment, your lender might want to take a snapshot of the donor's account showing the funds with sensitive information redacted. Again, this may be something you could present to the seller to strengthen your offer. Lenders may also add a letter stating that the buyer has sufficient funds for the down payment, whether from their own assets or a gift verified.


Changes in Intrusiveness and Documentation

In the earlier days, lenders required much more documentation from the gift donors, including bank statements, to ascertain that the funds were legitimate. The whole process is much less intrusive in today's practice. Most lenders no longer require detailed bank statements from the gifter as long as the gift letter and proof of funds are provided. This change makes it easier and faster for both the buyer and the donors.


Conclusion on Using Gift Funds

Using gift money as a down payment can be an excellent way to secure a home, but you need to operate within the rules. You have to ensure that the gift is from an eligible donor, provide a formal gift letter, and work closely with your lender, and make sure everything is documented. You will avoid delays and complications that people usually get into if you follow that process and plan ahead.






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