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Using gift money for your down payment

down payment gift letterUpdated by Michele Lerner

If you're ready to buy a house, but don't have enough money to make a down payment and cover your closing costs, you might wonder, "Who can gift money for mortgage down payment?" Your parents, other family members, or close friends can make up the difference with a cash gift.

A down payment gift, meaning no repayment is expected or implied, can help you qualify for a mortgage. But a "gift" that is really a loan in disguise could be considered mortgage loan fraud, a federal crime with serious consequences.

The distinction between a genuine down payment gift and loan fraud is precisely why mortgage lenders require a mortgage gift letter to document that any gift you receive is exactly that.

A gift letter for mortgage simply states that the money is "a bona fide gift that will never have to be repaid," says Joe Metzler, a mortgage specialist at Mortgages Unlimited in St. Paul, Minn.

What a down payment gift letter says

Typically no longer than a page, a standard mortgage gift letter states the amount of the gift, the source of the gift-giver's funds and the relationship between the two of you, Metzler explains. The FHA gift should say:

  • The funds will be applied to your home purchase
  • You are not expected to repay the gift
  • The money wasn't obtained behind the scenes from the seller, loan officer, real estate broker or anyone else associated with the transaction

Both the gift-giver and you, the recipient, must sign the mortgage gift letter. Signatures do not need to be notarized.

You will also need documentation to back up the gift letter, according to Peter Thompson, a senior loan consultant with loanDepot in Lisle, Ill. "The gift letter by itself isn't enough," Thompson cautions.

Mortgage gift letter rules depend on loan type

If you are applying for a conforming loan that your lender can sell to Fannie Mae or Freddie Mac, the only additional documentation you may need is a bank statement that shows the gift was deposited into your account. The general rule for conforming loans, Metzler says, is "sign the gift letter, prove the money is in the bank and that's pretty much it."

If you are pursuing Federal Housing Administration, FHA loan, you'll need to provide a paper trail of bank statements that follow the gift money from the giver through the financial system to you in addition to the FHA gift letter. In this case, Metzler explains, you must "sign the gift letter, prove you got the money, prove it's been deposited and prove it's cleared."

If you are applying for a jumbo loan or other type of financing that is neither conforming nor FHA, the lender's guidelines will dictate the necessary down payment gift letter documentation.

Sometimes the person giving you money for your down payment won't want to provide you with their bank statements. One workaround is for the giver to send the documents directly to the loan officer, who can protect the gift-giver's privacy, Thompson suggests. Lenders do not accept partial documents or documents that have information blacked out.

When should I present the down payment gift letter?

It is best to submit the down payment gift letter and documentation as early as possible in the loan process. However, some of the paperwork can be provided later as long as it is all turned in and approved by the lender prior to closing. The gift-giver can transfer the funds directly at closing as well, if all the documentation has been approved in advance. Sooner is certainly better, Thompson observes.

You can avoid the gift letter altogether

Mortgage lenders typically look at your bank statements for the previous two or three months, so if your gift is deposited well before you apply for a loan, you may be able to skip the mortgage gift letter. This strategy doesn't negate the genuine gift requirement, however. If the money involves any expectation or implication of repayment, it is not a true gift, but a loan that will have to be disclosed and could affect whether or not you qualify for a mortgage.

Gift money for down payment may be minor risk factor

Whether a gift helps or hurts your loan application is not always easy to determine. Buyers who bring 100 percent of their own money to the transaction demonstrate a bit more financial responsibility. But if you are otherwise well-qualified to get a mortgage, a gift that helps you make the down payment, pay the closing costs and perhaps keep a larger cash reserve generally should not hurt your chances.

"In most situations, as long as you meet the guidelines, a gift won't be a big problem," Thompson says. "If you have a lot of other risk factors, that would probably be put into the equation as an aspect of the risk."

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