Using a gifted down payment to buy a home

Potential homebuyers with generous connections may benefit from using gifted down payment funds. With a down payment gift letter, you can provide the money for a down payment to your mortgage lender even if it was obtained as a gift.

Here are some of the common questions and answers about payment gift rules in real estate:

What is a gifted down payment?

A down payment gift is when somebody contributes their own funds to help you afford a down payment for a mortgage. Mortgage lenders have specific rules about down payment gifts, including requirements for proving receipt of the funds.

Who can gift money for a mortgage down payment?

For conventional loans, acceptable gift funds must come from relatives. This includes parents, grandfathers, siblings, kids, fiancés and spouses. It can also include relatives via adoption or guardianship.

Other loans – such as those offered by the Federal Housing Administration – provide more freedom to give money as a gift. A down payment gift can also come directly from employers, unions, charitable organizations or other non-family members.

Why do lenders care about gift letters for mortgage down payments?

A gift letter is an official document proving the money for the down payment is actually a gift and not a loan. It must have information for both the giver and recipient, including contact information, source of funds and specific instruction for what the gift funds can be used for.

What about the tax implications of gift funds?

While you might not have to pay taxes on gift money, you may be required to declare it if it's over a certain amount. Any payment gift amount of $15,000 or more must be reported to the IRS.

Using gift money can be an excellent option for affording a down payment on a new home. As long as you follow the rules for your specific mortgage lender, a mortgage gift letter can be your ticket to home ownership.