Can you use money from a gift to make the down payment on a
mortgage? Yes, but you need to make sure you follow the proper
Young people often receive down payment assistance from parents
or other relatives when buying their first home. But it's not
enough to just show up with the money and hand it over at closing.
You have to be able to show it's truly a gift from a legitimate
Cash gifts need to be documented
For your lender, the important thing is to make sure the money
is really a gift and not a loan. A loan defeats the purpose of a
down payment, which is to have a portion of the home paid for up
front, free and clear. If you have another loan you need to pay
back on top of your home loan, it might compromise your ability to
pay off the mortgage itself.
If you're using gift money, you'll need to provide your lender
with a gift letter - your lender can provide the form. Signed by
both the donor and recipient, it states the amount of the gift, the
donor's relationship to you and that the money is a gift that will
not have to be repaid. The lender may also request information on
the source of the funds and the donor's financial status, to ensure
it is truly a gift.
Under IRS regulations, a parent or anyone else can give you a
gift of up to $13,000 per year, tax-free. If it's from both of your
parents, they can give you up to $26,000. And if they have the
means and are willing to include your spouse in their largesse,
that rises to $52,000. That would make a pretty good down payment
on a starter home.
They can give you more if they like, but then they may have to
pay a gift tax on the excess. The gift tax is something the giver,
not the recipient, pays. It's designed to prevent wealthy people
from avoiding the estate tax by giving big chunks of their estate
to their children before they die. Recipients rarely have to pay
income taxes on gifts, but you may need to declare them as income
if they exceed the guidelines above.
Who can the giver be?
In most cases, your lender will require that the gift be from a
close relative - a parent, sibling, grandparent, first cousin, etc.
In some cases you may be able to use a gift from a close friend if
you can show a longstanding personal relationship. This is to help
ensure the money is actually a gift and not a loan in disguise.
You also can't accept a gift from your employer, an associate or
anyone else who might be giving you money as an alternative form of
compensation, as the IRS would view that as an effort to evade
One thing you absolutely cannot do is accept a gift from the
seller of the home. This is basically a form of kickback that
lowers the true sales price of the home, so that the lender is
funding more of the sales price than it was led to believe. Since
banks use loan-to-value ratios to gage risk and set interest rates,
this is considered a type of mortgage fraud if kept hidden from the
lender and a federal crime.
On a conventional mortgage, most lenders will require that you
put at least 5 percent down using your own money, separate from a
gift, unless the gift is large enough to cover at least 20 percent
of the purchase price. An exception is VA and FHA mortgages, which
allow you to use a gift for the entire down payment.
In handling the money, you want to establish a clear paper trail
in case there are any questions about the gift or its legitimacy.
Deposit the full amount of the gift in your bank account or an
escrow as a single transaction - don't add to or take out any money
from it. The amount deposited should match the amount in the gift
letter. Receiving the money in the form of a cashier's check and
personally depositing it with a teller will produce paper receipts
that can also be used as supporting documents.
A monetary gift toward a down payment can help you qualify for a
mortgage, get a lower interest rate and, if it allows you to put at
least 20 percent down, avoid paying for private mortgage insurance
(PMI). If you're fortunate enough to receive such help, just make
sure you follow the correct guidelines so that everything goes