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What to know about using gift money for a down payment

Yahoo Personal Finance· Getty Images
Jamela Adam
6 min read

Saving tens of thousands of dollars for a down payment can be a challenge, especially with today’s elevated home prices and the high cost of living. That’s why down payment gifts are becoming increasingly common. According to data from Zillow’s 2023 Consumer Housing Trends Report, 39% of home buyers who financed their home with a mortgage in 2023 used money from family and friends as a source of their down payment. This is a 12% increase from 2022.

However, before accepting a generous down payment gift from your loved ones, you’ll want to understand the rules — including how to use the gift money and document it.

Learn more: How much down payment do I need for a house?

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Down payment gift money is cash given to you by someone (usually a relative such as your parents or grandparents) to help you afford a mortgage down payment or expenses like closing costs. There are typically two ways someone can gift money to you for a down payment: sending the funds to escrow or gifting them directly to you. Ask your real estate agent or lender which they recommend for your situation.

Read more: The average down payment on a house

Gift money for a down payment can’t come from just anybody. Here are the rules based on the type of mortgage you use.

According to Fannie Mae, gift money for a down payment on a conventional loan can only be provided by:

  • A relative, such as your spouse, child, or other dependent, or any other individual who is related to you by blood, marriage, adoption, or legal guardianship

  • A non-relative who shares a familial relationship with you, such as a domestic partner, fiancé, former relative, or godparent

The money cannot come from the house’s builder or developer, your real estate agent, or anyone else who would have a personal interest in the home sale.

Gift money for a down payment on FHA loans can come from the following sources:

  • Relatives

  • Employer or labor union

  • A close friend

  • A charitable organization

  • A governmental agency or public entity with a program offering financial assistance to low- and moderate-income families or first-time home buyers

Again, the gift money cannot come from a person or entity with an interest in the sale of the property, such as the seller, Realtor, builder, or broker.

The U.S. Departments of Agriculture and Veterans Affairs don’t have many restrictions on who can gift you money for a down payment. The only stipulation is that it can’t be from an interested party, like the seller, real estate agent, builder, or house developer. Note that while USDA loans and VA loans don't require down payments, gift money can help you start off with equity.

Dig deeper: How zero-down-payment mortgages work

Rules and requirements for down payment gifts vary by mortgage program. Here’s what they look like.

If you’re using a conventional loan to buy a house, you can typically accept a monetary gift for part or all of your down payment funds. You cannot accept gift money for an investment property. As with any type of mortgage, you must provide a gift letter.

If you’re using an FHA loan, you can use gift money for the down payment, closing costs, or housing reserves to qualify for the mortgage loan. To use the funds, you’ll need to provide a gift letter, a copy of the withdrawal document showing the gift money came from the donor’s account, and your deposit slip and bank statement to prove you received the funds. Depending on how the money was transferred, you might need to include a copy of the certified check or proof of the wire transfer.

With a VA loan, you can use gift money to pay for various mortgage-related expenses besides the down payment, including the VA funding fee and other closing costs. However, you can’t use gift funds to meet the cash reserve requirements while underwriting is underway.

Besides a mortgage gift letter, you’ll also need to provide a copy of the donor’s funds by check or electronic transfer or a closing disclosure showing receipt of the gift giver’s funds. You may also show proof of your deposit.

When receiving gift money for a USDA loan, you’ll need to provide a gift letter, a closing disclosure proving the receipt of the donor’s funds, or a copy of the check or electronic transfer. Check with your mortgage lender for more details on the documents required.

Learn more: How to buy a home with a 1% down payment

If your family member is gifting you money for a down payment, most mortgage lenders will require it to be documented in the form of a gift letter. The exact contents of a gift letter may vary depending on the type of loan, but in general, the letter should include:

  • The donor's name

  • The donor's relationship to the recipient

  • The donor's mailing address and phone number

  • The actual or maximum amount of the gift funds

  • The donor’s statement that no repayment is expected

Lenders ask for this letter to confirm that the money is a gift and doesn’t need to be repaid. This reassures them that you won’t add extra debt on top of your mortgage, which could increase your risk of defaulting on the loan.

Read more: How down payment assistance programs work

No. Gifted money is neither taxable nor deductible on your tax return. However, the person who gifted you cash for the down payment may be required to file tax forms or even pay taxes, depending on the amount gifted.

You can gift money for a down payment without paying a gift tax as long as you stay within the IRS exclusion amount, which is $18,000 for 2024. If you plan to gift more than $18,000, talk to a tax professional about the potential tax implications and any forms you need to fill out.

Yes, your parents can gift you $100,000 for a house — but they’ll have to file a gift tax return to disclose the gift since it exceeds the IRS exclusion amount of $18,000. Filing a return doesn’t necessarily mean they’ll automatically have to pay taxes. It just means the amount has been counted toward their lifetime gift tax exclusion. In 2024, the lifetime gift tax exemption is $13.61 million. This means your parents can give up to $13.61 million in gifts over their lifetime to each child without paying gift tax.

This article was edited by Laura Grace Tarpley.