How to get and use a mortgage gift fund to help with your down payment

Down payment gifts, or mortgage gift funds, are increasing in popularity as more and more first-time homebuyers enter the market. For buyers who can afford a monthly mortgage payment and other housing expenses, but who have a hard time saving up a down payment nest egg, a monetary gift from a family member or trusted friend can be a helpful solution.

But what exactly is a mortgage down payment gift, and how can you make sure it is properly distributed? Below, we offer insights you can use as you navigate the world of mortgage gift funds.

Key insights:

• If you are fortunate enough to be gifted funds toward your down payment, find out if the gift qualifies as a mortgage down payment gift.
• Both donors and recipients must follow specific steps to properly transfer and log a mortgage down payment gift that will be used at closing.
• Different mortgage types have different guidelines, so buyers should check with their mortgage consultant before securing a gift that will fund their down payment.

What are mortgage gift funds?

When deciding on a down payment amount, it’s usually advantageous to put down as much at closing as possible. So, when first-time homebuyers secure a home mortgage loan, close family and friends may offer to give them funds that help cover the down payment.

These gifts are more serious than Grandma’s annual birthday check, though. If the money given is above a certain amount, it qualifies as a down payment gift, which must be closely recorded and tracked throughout the home loan process.

The basic requirements of a mortgage gift fund

If buyers will fund some or all of their down payment via a mortgage gift fund, they must follow specific guidelines. While both the donor and recipient will have a longer checklist to follow, the three most basic requirements are:

• A gift letter from the donor to the recipient, detailing the amount gifted and its intended purpose.
• A receipt showing the transfer of funds from the donor to the recipient.
• Verification that the funds are now available in the recipient’s bank account.

What should the gift letter include?

Before the homebuyer applies for their loan, the donor should write a letter that clearly states the:

• Amount of the down payment gift.
• Donor’s name and contact information, including their address.
• Donor’s relationship to the homebuyer.
• Date the funds were transferred.
• Address of the property being purchased.
• Donor’s signature.
• Donor’s intention to offer the funds as a gift, and that the funds are not expected to be paid back by the homebuyer.

Who can gift money for a mortgage down payment?

The rules for who can gift money for a down payment depend on the type of loan the borrower is seeking. It’s very common for buyers who are using down payment funds to secure an FHA loan, and the FHA gift fund guidelines are pretty broad.

If you are using an FHA gift fund, the donor can be any friend or family member with whom you have a standing relationship; this relationship should be clearly explained in the donor’s letter. In some cases, your lender may request that you offer proof of a more distant relationship, such as a family friend. FHA borrowers may also receive down payment gift funds from employers, labor unions, charities and government agencies, if available.

If you are seeking a conventional home mortgage loan, the guidelines are quite a bit stricter. Only family members, domestic partners and the borrower’s fiance/fiancee can be approved as a down payment donor for a conventional loan.

What amount qualifies as a mortgage gift fund?

The answer to this depends on the borrower’s finances. Let’s consider a hypothetical bank account for a homebuyer named Jody. Typically, any amount over 25% of the borrower’s monthly income must be tracked by a lender when the loan is being approved and processed. If Jody’s monthly income is $5,000, then a gift of more than $1,250 should be recorded and tracked.

Along with gift amounts, lenders also pay attention to bank account history. If Jody usually keeps only a few hundred dollars in her account, and suddenly deposits $1,140 into the account, the lender may ask for an explanation of that deposit, even though it’s less than 25% of her monthly income.

Are there tax implications for gift funds?

There can be. It’s important that donors understand that they may be subject to a federal gift tax if their down payment gift exceeds $15,000 per recipient. The recipient should be sure to discuss this with the donor early in the process so that their donor is not hit with an unexpected tax liability. Potential donors should consult their tax advisor regarding large donations and potential federal gift tax liability.

How much can parents gift for a down payment?

In most cases, parents can give as much as they’d like to fund their child’s down payment, so long as the property in question will be their child’s primary residence. However, parents should keep in mind that if they collectively contribute more than $30,000 (each giving the $15,000 maximum), they may be subject to the federal gift tax. Parents should consult their tax advisor for details and exclusions.

Down payment gift guidelines

The guidelines for down payment gifts depend on the borrower’s loan type.

FHA borrowers:

• Can fund their entire down payment via a mortgage gift fund, provided they have a credit score of 620 or above.
• Must fund 3.5% of their own down payment if their credit score falls below 620.

Conventional buyers:

• Can fund their entire down payment via a down payment gift if they are putting down 20% or more.
• Must fund some of the down payment if they plan to put down less than 20% at closing. The borrower’s lender will advise on the exact amount that needs to come from their own pocket.

The do’s and don’ts of down payment gifts

There are simple guidelines that recipients should follow when receiving a down payment gift from a family member or friend.

Do:

• Keep a log of the gift, including its transfer to your bank account.
• Keep a copy of the donor letter in your personal files.
• Transfer the gift into your bank account at least 10 days before closing.
• Let your donor know that a gift higher than $15,000 may incur a tax bill (unless they are your parents, who can donate up to $30,000 without a tax implication).

Don’t:

• Log the fund as a gift if it’s actually a loan.
• Use any of the gift for personal expenses.
• Facilitate the gift without speaking to your lender; they can help you understand the exact steps you should take.

How do I record and track the gift funds?

Once the donor and recipient have agreed on an amount for the mortgage gift fund, they must each complete three tasks to guarantee a smooth path to the closing table.

Donor to-do list

In order to properly document and complete their down payment gift, the donor should:

1. Write an official gift letter (see above for details).
2. Write a personal check for the exact amount of the gift. This is the easiest way to document the transaction for a lender.
3. Provide a copy of the front and back of the check from their bank account to the buyer’s lender. This can be completed after the check clears.

Recipient responsibilities

Those receiving the gift will need to follow these three conditions:

1. Plan ahead to ensurethe funds are deposited at least 10 calendar days prior to the loan’s closing.
2. Go in person to a bank branch to deposit the gift fund into the account that will be used to pay the closing costs and down payment. Double check that the deposit slip matches what is in the gift letter and keep a deposit slip for each separate transaction or gift fund.
3. Verify that the funds have been properly transferred to the account, and share the verification with their lender. Remember, if the funds fall through, the loan may be at risk — so this is a critical task to complete.

Ready to begin the home buying process?

For homebuyers with generous family members or friends, a down payment gift can be instrumental to unlocking the dream of homeownership. To get started on the process of buying your home — with or without a mortgage gift fund — reach out to Edina Realty Mortgage for assistance. Our mortgage consultants will guide you through every step of the process, from pre-approval to the closing table.

_{(1) Prosperity Home Mortgage, LLC dba Edina Realty Mortgage is not a credit counselor. Information displayed is not credit advice and should not be relied upon or interpreted as such.}

_{(2) Prosperity Home Mortgage, LLC is not a financial or tax advisor and cannot and is not offering tax advice. Please consult a financial advisor or certified public accountant to determine what the tax implications of purchasing real estate may be.}

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