Using Gift Money For Your Down Payment

kitchen counter top view No money for a down payment? If you have a family member who is willing and able to give you the funds for a down payment, you may be in luck! Here’s how it works.

Who Is Allowed to Gift Money

Gift money may come from a family member. Some lenders will stretch that to include a fiance/fiancee. Friends are not allowed to gift the down payment. Why? Because lenders believe that your parents, a grandparent, or even a brother or sister would give you cash without expecting it to be returned. But a friend? No, lenders don’t think friendship stretches that far, and that it would actually be a secret loan. Remember, borrowed money cannot be used for a down payment.

What the Gifter Has to Prove

Lenders have a form Gift Letter that the person donating the funds must fill out and sign. In addition, they have to prove “ability to give.” This is done by providing two months’ bank statements showing where the gift money is coming from. Why? So the lender knows the person gifting the money isn’t taking a cash advance from a credit card or some other type of loan. Again, no borrowed money allowed for down payments.

I once had a home buyer tell me her dad said, “I am not showing them how much money I have in my account. You tell them I am not giving my bank statement! The letter is sufficient.” Well guess what? The loan was suspended by the underwriter until the dad decided to cough up the bank statements.  You can’t bully an underwriter into changing the rules, so you’ll want to let your donor know up front you will need copies of the bank statement later.

How to Execute the Gift for the Smoothest Closing

Do not have your donor transfer their funds into your bank account. This will cause a big, complicated paperwork mess that you don’t want to deal with. Instead, have them sign the letter that your loan officer provides and have the statements ready. Your loan officer will instruct you how and when your donor should transfer the funds and where. Typically, the donor can have the money wired directly to the escrow closing agent or closing attorney–the neutral third party who handles all disbursement of funds.

How Much Money You Need

For an FHA loan, the down payment is 3.5% of the purchase price. Gift money may cover all or some of that. If you have some money of your own but not enough, you can receive a partial gift.

If gift money will cover all of your down payment and if the seller will pay all of your closing costs, then you, the home buyer, will need only the appraisal fee (about $450) and two months’ total house payment (including principal, interest, taxes, insurance, and mortgage insurance) in reserves. This means you need to show that you will have two months’ payment left in your own bank account after your loan closes. Lenders will not fund your loan if you will be left with only a few dollars in your account afterward. That would be too risky for them and unwise for you.

6 responses

  1. My fiancée and I are getting married in April and just purchased a home. Her parents are gifting is the funds for the down payment which is 40k. Gift tax rules allow gifts up to 14k tax free so her dad and mom are each gifting her 14k and her dad is gifting me 12k. However, the underwriter denied the portion that is a gift to me bc we are not legally married yet. Do you know why this is and can you provide any tax free workarounds to avoid this issue. We have the 12k ourselves. Could we juts fork up our cash and have him gift me the refund as soon as the loan closes or do they track such circumstances. Furthermore, if they do track that, could I just open a brand new bank account that they would have no record of and receive the gift funds there as our “refund”? Any help would be much appreciated. I understand I should probably just consult a CPA.

    1. Greg, I would say you have a difficult underwriter. Not all underwriters will disallow gift money to a fiance. I am going to send you a private email in order to provide you help with finding a better lender.

  2. Victoria Englin | Reply

    Hi there I have a similar question to the previous comment. Me and my fiancee are planning to buy a house we’ve been togeather for 8 years and share 3 children and just haven’t decided on a date to be married. We are receiving some funds from his mother ( he’s the one taking out the mortgage I will not be on the loan) but the majority of our down payment would come from my parents about 6k from them. My issue is i am worried about them denying the loan because the gift is not from a direct relative. Would you be able to clarify if he could even receive a gift from my parents. Thank you.

    1. Victoria, if you have been living together for eight years, you might be already legally married as a common law marriage. I don’t know what state you are in, so you will need to check the law for your state. If you are in a legal marriage in your state, then your fiance can make application as a married man and a gift from his in-laws will be accepted.

      If you are not married and have no proof that you are engaged to be married (such as a wedding announcement in your local newspaper), then you will need to be on the loan also in order to use gift money from your parents.

      I don’t know any underwriters who will accept “gift from my girlfriend’s parents” as a valid source.

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