For many first-time homebuyers, the biggest obstacle is not the monthly payment.
It is coming up with enough cash for the down payment and closing costs.
That is where gift funds can sometimes help.
Parents, grandparents, or other eligible people may be able to provide money toward your home purchase. Depending on the loan program, those funds may be used for some or all of your down payment, closing costs, and, in some cases, required reserves.
But there is an important catch:
A gift needs to be handled correctly.
If someone simply transfers $20,000 into your bank account right before you apply for a mortgage, the lender may suddenly have a large deposit that needs to be explained and documented.
The easier approach is to talk with your lender before the money moves.
What Are Gift Funds?
Gift funds are money provided to you for the home purchase with no expectation that you will repay it.
That last part is important.
If your parents give you $15,000 but expect you to repay them $500 per month after closing, that is not really a gift. It may instead be a debt that needs to be disclosed and considered when you qualify.
A legitimate gift generally does not create a repayment obligation.
For conventional financing, Fannie Mae currently allows personal gifts from acceptable donors to be used toward eligible expenses on a principal residence or second home, subject to the particular transaction and loan requirements.
Who Can Give You Gift Funds?
This depends on the loan program.
For Fannie Mae conventional loans, acceptable donors can include relatives such as a spouse, child, dependent, or someone related by blood, marriage, adoption, or legal guardianship. Other eligible relationships may also qualify under the applicable guidelines.
Other loan programs may have different definitions.
That is why you should not assume that money from:
- A parent
- Grandparent
- Brother or sister
- Fiancé
- Domestic partner
- Employer
- Friend
will automatically be treated the same way.
Tell your lender who is providing the money before making the transfer.
Do You Have to Put Any of Your Own Money Down?
Sometimes no.
This surprises a lot of first-time buyers.
Under current Fannie Mae guidelines, for a one-unit principal residence, a minimum contribution from the borrower’s own funds is generally not required when gift funds are otherwise permitted—even when the loan-to-value ratio is greater than 80%.
That means, depending on the transaction and loan program, it may be possible for eligible gift funds to cover the entire required down payment.
That does not mean every buyer or every loan program allows this.
For example, multi-unit properties, second homes, manually underwritten loans, or other programs can have different requirements.
The key is to find out which rule applies to your specific loan.
What Is a Gift Letter?
Mortgage lenders will commonly require a gift letter.
The purpose is to document that the money is truly a gift rather than an undisclosed loan.
The letter generally identifies things such as:
- The donor
- The borrower
- The relationship between them
- The amount of the gift
- The intended use of the money
- Confirmation that repayment is not expected
The exact wording and documentation depend on the loan program.
Your lender can usually provide the form or tell you what the letter needs to include.
You do not need to invent one yourself before applying.
The Transfer of the Money May Need to Be Documented
The lender may also need to verify that the donor actually had the funds and that the gift reached the borrower or the closing agent.
Depending on the program and circumstances, documentation might include:
- Bank statements
- A copy of a check
- Wire-transfer confirmation
- Deposit documentation
- Closing documentation showing receipt of the funds
Again, this is why I recommend asking before transferring the money.
A properly documented gift is usually much easier than trying to explain a mysterious deposit later.
Don’t Deposit the Money First and Ask Questions Later
Imagine your parents want to help you with $25,000.
They transfer the money into your checking account.
A few weeks later, you apply for a mortgage.
Now your bank statement shows a $25,000 deposit.
The lender may need to determine:
Where did this money come from?
The answer may be perfectly acceptable.
But now you have to reconstruct the transaction.
It would have been much easier to say beforehand:
“My parents want to give me $25,000 toward my home purchase. How do you want us to handle the transfer?”
The lender can then tell you exactly what documentation is required.
Gift Funds and Large Deposits Are Closely Related
This is why gift funds and large bank deposits often overlap.
On a traditional purchase mortgage, certain large deposits may need to be sourced if those funds are necessary for your down payment, closing costs, or reserves.
Fannie Mae requires lenders to document the source of a large deposit when those funds are needed to complete a purchase transaction.
Gift funds can be an acceptable explanation.
The problem is usually not that you received a gift.
The problem is when nobody documented it.
Can Gift Funds Pay Closing Costs Too?
Depending on the loan program, yes.
For example, Fannie Mae permits eligible personal gift funds to be used for all or part of:
- The down payment
- Closing costs
- Financial reserves
subject to the applicable borrower-contribution requirements.
That can make gift funds especially useful.
A buyer may have enough savings for the down payment but want help covering closing costs so that some emergency savings remain after the purchase.
That can sometimes be more financially comfortable than using every available dollar at closing.
What Is a Gift of Equity?
There is another type of gift that can occur when you buy a property from a family member.
It is called a gift of equity.
Suppose your parents own a home worth $500,000 and agree to sell it to you for $450,000.
Part of their equity in the property may potentially be treated as a gift to you, depending on the loan structure and program rules.
Fannie Mae permits eligible gifts of equity on principal-residence and second-home purchases and allows them to be used toward down payment and closing costs, although not toward financial reserves.
Family transactions can have additional underwriting and appraisal considerations, so these should be planned carefully.
A Gift Does Not Have to Mean You Should Buy More House
This is an important financial point.
Suppose you originally planned to buy a $500,000 home.
Then your parents offer you $50,000.
It can be tempting to immediately increase your budget.
But that gift can be used in several ways.
You might:
- Increase the down payment
- Reduce the loan amount
- Cover closing costs
- Preserve more of your own savings
- Potentially improve the overall loan structure
The best use of the money is not automatically buying a more expensive home.
Look at the complete financial picture first.
Be Careful About Calling a Loan a Gift
Suppose a relative says:
“I’ll give you $30,000, but just pay me back whenever you can.”
That may sound informal, but there is still an expectation of repayment.
Tell your lender.
Mortgage underwriting requires lenders to investigate indications that money used for the transaction may actually be borrowed.
Trying to disguise borrowed funds as a gift can create a much bigger problem than simply asking about the available options.
Transparency is the easier route.
What About Mobile and Manufactured Home Financing?
Manufactured and mobile homes can create another important distinction.
If the home and land are being financed as real property with a traditional mortgage, gift-fund rules may resemble those used for other mortgage transactions.
But a mobile or manufactured home located on leased land may instead be financed with a personal-property or chattel loan.
Chattel lenders establish their own underwriting requirements.
Some may accept gift funds but require documentation.
Others may have substantially different asset-verification requirements from traditional mortgage programs.
And, as discussed in my article about large deposits, some mobile-home chattel lenders do not require down-payment funds to be sourced in the same way a traditional mortgage lender does.
That can make the documentation much simpler with certain programs.
But it is not universal.
Always ask the lender handling the chattel loan what is required before transferring money.
A Simple Gift-Fund Example
Suppose you are buying your first home and need:
$20,000 down payment
$10,000 closing costs and prepaid expenses
Total estimated need:
$30,000
You have $18,000 available.
Your parents offer to give you $15,000.
Depending on the loan program, that gift could potentially help cover the difference while allowing you to retain some of your own savings.
But before they transfer the $15,000, you contact your lender.
The lender tells you:
- Who can legally provide the gift under the program
- What gift letter is required
- How the transfer should be documented
- Whether the donor’s account needs to be verified
- Where the money should be sent
Now the funds arrive with a clean paper trail.
That is much easier than explaining the transaction after the fact.
The Best Rule for Gift Funds
If someone wants to help you buy your first home, that can be a tremendous advantage.
Just remember:
Talk to your lender before the gift is transferred.
Do not assume that because the money is legitimate, the lender will not need documentation.
A short conversation before the transfer can save considerable time during underwriting.
Want to Learn More Before You Buy?
I create straightforward videos for California homebuyers covering first-time homebuyer financing, down payments, credit, qualification, manufactured and mobile homes, and the issues buyers should understand before making an offer.
Watch My California Home Loan Videos on YouTube
If you’re considering buying and a family member wants to help with your down payment or closing costs, you can also contact me before the money is transferred.
We can look at your financing options and determine how the gift should be handled for the loan program you are considering.
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This article provides general educational information and is not a commitment to lend. Gift-fund eligibility, acceptable donors, documentation requirements, borrower-contribution requirements, and permitted uses vary by lender, loan program, borrower, and property type. Always confirm the requirements of your specific loan program before funds are transferred.