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Saving for a down payment can be one of the biggest obstacles to homeownership — especially for first-time home buyers, who can’t use profits from a past home sale. In these cases, gift money or grants can be a great resource for reaching your minimum down payment.
According to the National Association of Realtors’ 2021 Home Buyers and Sellers Generational Trends Report, 10% of buyers used gift funds from friends or family for their down payments. This trend was most common among home buyers between the ages of 22 and 30, as 23% reported using gift money.
When you apply for a preapproval or a mortgage, you’ll likely be asked whether any of your homebuying funds will be coming from a gift. Here’s what you need to know to answer that question with confidence.
Where to get gift money
If you’re getting a conventional loan, any gift fund deposits in your account from the past two to three months can come only from an approved list of sources.
According to mortgage lender Fannie Mae, acceptable donors include close relatives and your spouse, fiancé or domestic partner.
“Most people are getting a gift from a relative,” says Matt Woods, CEO of SOLD.com, a real estate service platform for home sellers. Still, he has seen cases where buyers with conventional loans have run into problems because their down payment came from a source that didn’t meet their lender’s approval. “Every once in a while, that rears up and we have to say, uh-oh, you’re not actually allowed to accept a gift from just a friend.”
Loans guaranteed by a federal agency are much more lenient with gift money donor rules, as they allow for funds to come from just about anyone, including friends and extended family. These include loans backed by the Federal Housing Administration, Department of Veterans Affairs and U.S. Department of Agriculture.
You don’t need to have a wealthy family to apply gift money toward your down payment. For example, both conventional and government-backed loans also accept grants from your employer, church or labor union as gift money, as well as grants from nonprofits, tribal programs and public agencies.
If you’re interested in down payment assistance programs, you can contact your state’s housing finance agency or your local Department of Housing and Urban Development office. For instance, Nevada’s Home Is Possible program provides qualified recipients with up to 5% of their loan’s value for down payment or closing costs, while eligible borrowers in Virginia can get up to 2.5% of the purchase price of their new home through Virginia Housing’s Down Payment Assistance Grant.
People who can’t give you gift money
No matter what kind of loan you have, you can’t receive gift money from anyone who would profit from your home purchase, such as the builder or the real estate agent.
The exception to this is closing cost assistance. The seller can pay some or all of the closing costs, depending on state laws and the type of mortgage. This is most commonly seen in slow markets as a way to attract buyers.
How much gift money you can apply toward a down payment
Depending on your financial profile and the type of loan you’re receiving, your lender may require you to put some of your own money toward the down payment if your gift funds total less than 20% of the mortgage. If you’re buying a second home or a multi-unit property, for example, you’ll be expected to contribute at least 5% of your own funds, according to Fannie Mae.
When a gift is no longer a gift
Most lenders will ask for only two to three months of bank statements when assessing your creditworthiness. If gift money has been in your account for longer than that, it’s considered “seasoned.” This means that in the eyes of the lender, the funds are yours, and you may not have to document them the way you would a gift.
Sudden large deposits in your account within the last two to three months may prompt questions and influence lenders to look more closely at your funding, Woods says. If money has been sitting in your account for a while, it’s more likely that the money really wasn’t a loan and that it came from a credible source.
If the money sits in your account for long enough that it becomes seasoned, Woods says, you could circumvent the need to meet any personal contribution requirements if you’re putting down less than 20%. If you know that you’ll be receiving gift money, it could be beneficial to arrange the donation before you begin your home search in order to ensure that the money ages in your savings account.
Why lenders have rules about gift money
When you apply for a mortgage, the lender has to assess the likelihood you’ll be able to repay it. Making a larger down payment suggests to them that you are more financially secure and are more likely to repay the loan — so if some of those funds didn’t come from you, the lender wants to know. And if some of your funds did come from another source, the lender wants to ensure you don’t need to pay them back, potentially affecting your ability to repay the lender.
Gathering the required documentation for gift money
The person (or entity) providing you with gift funds has to supply a gift letter for the lender. The letter should include the following information:
The donor’s name, address and phone number.
The donor’s relationship to you.
The gift amount.
A statement that you aren’t expected to pay back the gift.
A statement that the donor has no interest in the sale of the property.
The date that the funds were transferred.
Signatures from you and the donor.
Tax implications for gift funds
In most cases, the person receiving gift money doesn’t have to pay taxes on it. However, the person gifting the money might have to file additional tax paperwork. The annual exclusion per individual recipient is $16,000 for 2022, so if your gift exceeds that, the donor will have to file a gift tax return. This gift will go against their lifetime exclusion — however, as this is currently set at $12.06 million, they’ll likely be a long way from triggering a tax penalty.
Where to find more down payment help
If minimizing your down payment is your priority, you can pursue loan options with low-down-payment requirements. Fannie Mae’s HomeReady loan and Freddie Mac’s Home Possible loan, for example, both require as little as 3% down. FHA loan borrowers need to put only 3.5% down, and qualified VA and USDA borrowers can get up to 100% financing with no money down.