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How to Complete a Gift Letter for a Mortgage Down Payment
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When someone offers to give you money for a down payment on a house, your lender requires a gift letter for a mortgage, along with documents showing the money changing hands. A gift letter is a statement from a donor (usually a relative or friend) explaining that the money is being given without expectation of repayment.
Knowing how to complete a gift letter for a mortgage down payment will prevent mistakes that could delay or sabotage your loan approval.
What is a gift letter?
A gift letter for a mortgage down payment is a written statement that the funds are a gift rather than a loan that has to be repaid. The letter must specify who is gifting the money and where the donor’s funds are coming from, as well as explain the relationship between the donor and the recipient.
Gift letter template
Lenders generally provide a boilerplate mortgage gift letter template for you to use. Below is a typical gift letter template you can share with donors, along with a detailed sample gift letter with basic instructions for filling it out and explanations of what the fine print means.
What information must a gift letter include?
Mortgage lenders require at least eight pieces of information in a gift letter, including:
- The exact dollar amount of the gift.
- The donor’s signed statement that no repayment is expected.
- The address of the property associated with the down payment.
- The information about the donor’s account, including the name of the bank or investment company, the account number and what type of account it is (checking, savings or investment).
- The date the funds were or will be transferred.
- The donor’s relationship to the borrower.
- The donor’s name, full address and telephone number.
- The dated signatures of both the donor and the borrower.
At the bottom of most gift letters, there’s a notice about making false statements. If the money being given isn’t really a gift, don’t complete a gift letter or you could be accused of mortgage fraud.
How much money can you receive as a gift?
Many home loan programs allow some or all of a down payment gift to come from a variety of sources. You can get gift money from a relative or friend, your employer or local labor union, a government agency or even a charitable organization.
The amount of gift funds you can apply to your down payment depends on the loan program you select. Depending on the loan program, you might see slight variations in the format of the gift letter, but the basic required information is the same.
Here’s a look at the gift letter guidelines for each type of loan.
Fannie Mae gift guidelines
Lenders follow Fannie Mae guidelines to offer conventional loans, the most common type of home loan taken out in the United States. Conventional loans have a minimum down payment requirement of 3%, and the entire amount can come from a gift for a single-family residence.
If you’re eligible for the Fannie Mae HomeReady® loan, you’ll only need 3% of your own funds to buy a two- to four-unit home — the rest can be gifted. However, a 5% minimum down payment from your own funds is required to buy a multifamily home with a regular conventional loan.
Freddie Mac gift guidelines
Similar to Fannie Mae, Freddie Mac provides funding for conventional loans. Under Freddie Mac guidelines, your entire down payment can be gifted by a relative if you’re buying a single-family home as your primary residence. However, unlike Fannie Mae, you don’t need to meet any minimum borrower contribution if you’re getting a gift of 20% or more to purchase a two- to four-unit home.
Freddie Mac also allows you to use wedding gift funds from relatives and friends, as long as you show the funds being deposited into your bank account within 90 days of your wedding and provide a copy of your marriage license.
FHA gift guidelines
The Federal Housing Administration (FHA) insures loans made by FHA-approved lenders and allows the entire minimum 3.5% down payment to be gifted. FHA gift letter records are required, with supporting documents resembling those necessary in conventional guidelines. FHA loans are popular with some first-time homebuyers because they have more flexible borrowing guidelines for borrowers with lower credit scores and smaller down payments.
VA gift guidelines
The Department of Veterans Affairs (VA) guarantees home loans for eligible military borrowers. VA loans don’t require a down payment, but VA guidelines allow borrowers to use gift funds toward a down payment if they want to make one. The gift letter and documentation requirements are similar to FHA and conventional loans.
USDA gift guidelines
Families with low- to moderate-incomes can purchase homes in approved rural areas of the country with a loan guaranteed by the U.S. Department of Agriculture (USDA). Like the VA loan program, USDA loans require no money down. Gift funds are permitted with a gift letter, and supporting documents are consistent with the gift letter rules of other loan programs.
Mortgage down payment gift rules
Your gift letter has to be backed up with documentation. Here are some key rules about mortgage down payment gifts you’ll want to follow closely, so your loan approval can go smoothly:
You need a paper trail that traces the funds from the donor’s bank account to your account. If you haven’t received the gift money yet, your lender will need documentation (bank statements, for example) showing the funds leaving the donor’s account and being deposited into yours.
You’ll typically need to provide:
- The gift check and deposit slip showing funds deposited into your account.
- The withdrawal slip or bank statement showing the funds leaving the donor’s account.
- The check made out directly to the closing agent. (Add the escrow number of the transaction to the check so the funds are directed into the escrow account tied to your purchase. You can get this information from the closing agent.)
- The settlement statement showing funds deposited or wired into the escrow account.
Lenders will also check the following items to ensure the gift letter paperwork is in order:
Your gift letter can’t reference any repayment terms. A gift is a gift, and anything indicating the money must be repaid is unacceptable. If you use a standard mortgage gift letter template, the pre-printed language includes a statement that no repayment is expected.
Your relationship to the gift donor must be clear. Conventional lending guidelines allow gift funds from a close relative or friend only. In some cases, the lender may require proof of your relationship.
Below is a list of acceptable relationship types for gifting:
- Child or other dependents
- Any individual related by blood, marriage, adoption or legal guardianship
- A fiancé/fiancée or a domestic partner
Your gift can’t come from interested parties. Your real estate agent, home builder and the home seller cannot be gift donors.
You must fully document the source of the donor’s funds. Besides providing banking information, the donor must provide proof the money was already in the account the gift funds are coming from — that means the donor must provide a bank or investment statement. Have a frank conversation with a potential gift donor to ensure they’re comfortable with it; if they don’t provide documentation and you can’t come up with the down payment funds, your loan may not be approved.
Gift letter rules for different occupancy and property types
Most loan programs allow you to get a gift for your entire down payment, as long as you’re buying a one-unit (single-family) home as your primary residence. However, some programs require you to come up with part of the down payment cash on your own, depending on the type of property you’re buying.
There are also extra rules for down payment based on occupancy type, which just refers to whether you live in the home full time or part time, or if you rent it out. Lenders commonly refer to this as primary, second home or investment occupancy. Government-backed FHA, VA and USDA loans only allow you to finance a primary residence — a home you live in full time.
|Loan program||Occupancy type||Property type||Minimum borrower funds required|
|Conventional||Primary home||Single-family||None; all funds can be gifted|
|Second home||Two units||3% of sales price with less than 15% down payment*|
|Three to four units||3% of sales price with less than 25% down payment*|
|Single-family only||5% of sales price with less than 20% down payment|
|Investment property||One to four units||100% must be borrower’s funds|
|FHA||Only primary permitted||One to four units||None; all funds can be gifted|
|VA||Only primary permitted||One to four units||None; all funds can be gifted|
|USDA||Only primary permitted||One to four units||None; all funds can be gifted|
*For Fannie Mae HomeReady eligible borrowers only. Regular conventional loans require 5% borrower funds for two- to four-unit homes with a 20% down payment.
Your gift can’t be used to buy an investment property. Gifts can be used to buy a primary or second home, but not an investment property. Only conventional loans allow financing on investment homes, but because the property is used to generate income, lending rules are stricter.
You may be able to get a gift for cash reserves. Some lenders require you to have ample cash or mortgage reserves to prove you have a few months of monthly payments in the bank to cover a financial emergency. Conventional lenders allow you to get a gift for reserves if needed. However, FHA and VA loans don’t allow gifts to go toward mortgage reserves, so you’ll need to save up your own cash.
Are there tax consequences for giving down payment gifts?
The IRS taxes gifts made over a certain dollar amount. For 2020, you can gift up to $15,000 without any tax penalty. In most cases, the donor has to pay the gift tax, but there may be special cases when the gift recipient can agree to pay it instead. Check with a tax professional for advice on your specific situation.
What is a gift of equity letter?
A gift of equity letter allows a seller to gift a portion of their home’s equity to a buyer who is a family member, fiancé/fiancée or a domestic partner. Families wanting to pass down a home to future generations can accomplish that goal with a gift of equity.
Home equity is the difference between a home’s value and the loan balance, and some loan programs let you gift equity to family members instead of gifting cash. With a gift of equity:
- The gift represents the amount of equity the seller gives to the family buying the home.
- The documentation requirements are similar to a regular gift letter.
- There is no exchange of actual money.
- The equity is given to the buyer as a credit at closing.
Gift of equity rules vary slightly depending on the type of loan you apply for. Here’s a quick overview:
- Fannie Mae and Freddie Mac. Gifts of equity must be made to a relative, fiancé/fiancée or domestic partner.
- FHA. Gifts of equity are allowed for home sales between family members.
- USDA. Any gift of equity must be applied as a reduction to the home price.
- VA. The VA doesn’t allow gifts of equity.