Accepting Gifts for Your Conventional Loan Down Payment

Did you know gift funds can pay for the down payment and closing costs.

Money in a gift boxGift funds are an excellent source of funds to use for your down payment and closing costs on a home purchase. Today's purchasers often get cash down payment presents. The likelihood of receiving a monetary gift is highest for first-time homebuyers, although repeat and move-up purchasers may still get one.

But if someone gives you money as a gift, there are some rules you should follow to make sure that the money goes toward the down payment or closing costs.

First, make sure that the gift is unconditional. This means that you don't expect anything in return, other than the satisfaction of knowing that you helped someone achieve their dream.

Gift money is a great way to get money for a down payment and other costs when you buy a home.

Fannie Mae Gift Funds Guidelines

A conventional mortgage is a loan program that is not insured by FHA, VA, or any other agency. Conventional mortgage loans can also be referred to as “non-government” loans. There are several gift fund guidelines that you should follow if you plan on using gift funds for your down payment and/or closing costs.

Who Can Donate Gift Funds?

Gift funds must come from an acceptable donor. The Federal National Mortgage Association (Fannie Mae) permits the following individuals to gift money:

A relative is someone who is connected to the borrower through blood, marriage, adoption, or legal guardianship. Or a domestic partner, fiancé, or fiancée. Charitable organizations are permitted to provide gift funds for the mortgage down payment.

It is illegal for the donor to be the developer, builder, real estate agent, or any other interested party in the transaction, nor to be affiliated with any of these parties.

Conventional Loans Gift Funds Requirements

Before, the homebuyer had to put up 5 percent of their own money along with the gift money to pay for the house. Federal Home Loan Corporation (Fannie Mae and Freddie Mac) got rid of this rule, which is good news.
The donor can now contribute the entire down payment to assist the borrower with the purchase.

The gift fund standards include a few minor exclusions. Regardless of the down payment, the regulation change allows for limitless gift monies. The modification affects primary residences and second houses with one to four units.

When purchasing a primary dwelling with two to four units or a second home, the borrower is required to make a down payment of at least 5% of the purchase price from his or her own assets if the down payment is less than 20%. (5 percent to 19 percent).

Gifts can be used to augment the down payment, closing expenses, and reserves once the minimum borrower contribution has been satisfied.

Donor Needs To Complete Gift Funds Letter Provided By Lenders

Parents writing a check for gift moneyMost lenders require a verified, detailed gift letter. This letter must be signed by the donor and the borrower, and it must be sent to the lender with your mortgage application.

The lender will review the letter and verify the amount of funds that were given as a gift to the borrower, and then disburse those funds to the borrower at the closing table. The letter should contain the following information:

  1. state the amount of the gift
  2. the date of the transfer of funds
  3. contain a statement from the donor saying that they don't expect anything in return.
  4. Name, address, telephone number, and relationship to the borrower of the donor.

When the borrower's personal financial resources are combined with a gift from a family member or domestic partner to meet the minimal cash down payment requirement, the requirements must be met:

A letter attesting that the donor has spent the last year living with the borrower and would continue to do so at the new residence.

Documents demonstrating a history of joint habitation between the borrower and the donor. Donor and borrower addresses must match. A copy of a driver's license, a bill, or a bank statement are all examples of acceptable documents.

The mortgage lender will provide a gift letter template to help with the transfer.

Verification of Gift Funds for a Conventional Mortgage

  1. a copy of the check from the donor and the deposit slip from the borrower
  2. give the closing agent a copy of the donor's check, or
    a receipt for the donor's check on a settlement statement
  3. a copy of the withdrawal slip from the donor and the deposit slip from the borrower
  4. The lender must show that the donor sent the closing agent a certified check, a cashier's check, or another official check if the money isn't transferred before settlement. Gifts in cash are not accepted.

Don't Commit Loan Fraud

Couple standing in front of a judgeGift funds cannot be a loan between the donor or borrower. In fact, it's a crime to borrow money and use the gift funds. The reason for this is that when you give someone a gift, you don't expect to get that money back.
Typically, we offer gifts to someone we care about, and we would not want them to feel obligated to repay us for our kindness.

Using Your Gift Money With a Conventional Loan

Fannie Mae and Freddie Mac graphicConventional loans are available to the majority of borrowers and are not guaranteed by the federal government.

A conventional loan is not as difficult to obtain as many people assume. The key to qualifying for a conventional loan is to make sure that you have a strong credit score, good income, and sufficient money for a down payment and closing costs. If you have gift funds that you're using for your down payment, you must have a plan for when you will use those funds. With a conventional loan, you can use gift funds for your down payment and closing costs if you follow the gift fund guidelines listed above.

Investment Property Gift Funds

You can't use gift money to put down on an investment property. Most of the time, if you want to buy real estate to make money off of it, you'll have to pay for the down payment with your own money.
Learn about Investment Properties

Gift Funds for a Second Home

Second home on a beachThere is no requirement for a minimum borrower contribution from the borrower's own cash. All monies required to complete the transaction can be provided as a gift when the down payment is greater than 20%.
If the down payment is less than 20% (5%, 10%, 15%), the borrower must provide at least 5% of their own money. Gifts may be used to the down payment, closing fees, and reserves after the minimum borrower contribution.
Learn about Second Homes

Is a Gift for a Home Purchase Taxable?

IRS reporting formsThis is a question that commonly comes up among borrowers who are receiving gift money from their parents for their first home down payment.

IRS does have a requirement for gift tax over annual exclusion. As of 2022, the annual exclusion is $16,000. If the gift exceeds the annual exclusion, and the donors are the parents of the borrower, the parents can simply write two checks to the home buyer. That covers up to $32,000. 

Rotating question markFAQs About Gift Funds

Q. If Someone Gives Me Money, Why Do I Need A Gift Letter?

A. Lenders actively monitor gift money because they want to guarantee that a present is really a gift and not a loan. If it's money that must be repaid, which would be deemed debt, it may have a significant impact on the debt-to-income ratio lenders use to evaluate a prospective borrower's financial situation.

Q. Can Gift Funds Be Used For Closing Costs And Reserves?

A. Yes, gift funds can be used for closing costs and reserves. The donor will need to provide a gift letter stating that the funds are a gift and not a loan.

Q. Can You Use Gift Money for Any Loan Program?

A. Gift money can be used for any type of loan program, including the FHA loan, VA loan and USDA loan program. The lender will just need to verify that the gift funds are coming from a family member or close friend and that there is no expectation of repayment.

Q. People who can’t give you gift money

A. Interested parties in the transaction such as the real estate agent, builder, developer, etc., are prohibited from providing gift funds.

Q. How much money can be gifted for a down payment?

A. The amount of money that can be gifted for a down payment depends on the lender and the loan program. Most lenders will allow the entire down payment to be gifted, while other lenders may limit the amount that can be gifted. It's important to check with your lender to see what their requirements are.

Q. What Are Gift Funds?

A. Gift funds are monetary gifts given to a person for a specific purpose. Gift funds are not loans and do not need to be repaid.

Q. Why Do Lenders Care About Gift Letters For Mortgage Down Payments?

A. Lenders care about gift letters for mortgage down payments because they want to make sure that the money is actually a gift and not a loan. They also want to make sure that the person giving the gift has the financial means to do so.

SOURCE: Personal Gifts


In conclusion, a gift fund can be a great way to get a conventional loan. It can help you avoid having to provide a large down payment or pay for private mortgage insurance. However, it's important to understand the rules and regulations of using a gift fund to get a loan. Be sure to consult with a loan officer to find out if using a gift fund is the right option for you.

Recommended Reading

  1. Income Guidelines to Qualify for a Conventional Loan 
  2. Jumbo Loan Qualifications: What you need to know! 
  3. Jump on the Fannie Mae RefiNow Program for a Lower Rate