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

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.

Down payment gifts, or mortgage gift funds, are increasing in popularity as more and more first-time homebuyers are finding themselves struggling to pull together a down payment. 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 to help you navigate the world of mortgage gift funds.

What are mortgage gift funds?

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

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:

1. A gift letter from the donor to the recipient detailing the amount gifted (and noting that it does not need to be repaid) and its intended purpose toward the home purchase.
2. A receipt showing the transfer of funds from the donor to the recipient.
3. Verification that the funds are now available in the recipient’s bank account.

What will the gift letter include?

When applying for a loan, let your lender know you will be receiving a gift as soon as you know you will be receiving one. They will supply you with a gift letter to be completed with the following details:

• 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.

If you are using gift funds with an FHA loan, 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 fiancé can be approved as a down payment donor for a conventional loan.

Loan down payment gift guidelines

The guidelines for down payment gifts depend on the borrower’s loan type. From FHA to Conventional to downpayment assistance programs, gifts are always allowed to be used. However, borrowers may be required to fund part of the down payment from their own funds. Consult with your lender for details specific to your program.

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 or a state tax. 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.

The dos 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 gift letter in your personal files.
• Transfer the gift into your bank account at least 10 days before closing.

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. Complete an official gift letter (see above for details).
2. Write a personal check for the exact amount of the gift letter, or complete a wire transfer using only secure wire instructions received from your title closer.
3. If writing a personal check, 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 a personal check for the gift, follow these three conditions:

1. Plan ahead to ensure the 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.

For those having the funds wired to the title company prior to closing, please be sure the donor completes the wire no less than 24-48 hours prior to closing.

Ready to begin the home-buying process?

For homebuyers with generous family members or friends, a down payment gift can be instrumental in 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 an <href="#/?fl=Customer%20Care%20Page%20Contact">Edina Realty agent or Prosperity Home Mortgage for assistance.

Prosperity Home Mortgage is an affiliate of Edina Realty. See Affiliated Business Arrangement Disclosure Statement