Rules for Using Gift Funds for a Down Payment on a House

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.

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.