How to Use Gift Money for a Down Payment on a Mortgage

15 October 2025

Buying a home is a huge milestone, but let’s be real—it’s also one of the biggest financial commitments you’ll ever make. If saving for a down payment feels overwhelming, you’re not alone. The good news? Gift money from family or close friends can help you get into your dream home faster.

However, using gifted funds for a mortgage down payment isn’t as simple as depositing a check and calling it a day. Lenders have strict rules about where your money comes from, how it’s documented, and whether it’s truly a gift (not a loan in disguise).

So, how do you navigate the process? Let’s break it all down in a way that’s easy to digest.

Can You Use Gift Money for a Down Payment?

Yes! Mortgage lenders allow homebuyers to use gift money for their down payment, but there’s a catch—it must be an actual gift, not a loan. If a lender suspects the money needs to be repaid, it could affect your loan eligibility.

Gifted funds are most commonly accepted when they come from immediate family members, but some lenders may also allow gifts from close relatives, godparents, or even employers.

However, rules vary by lender and loan type. Let’s dive into the specifics.

Mortgage Gift Rules Based on Loan Type

Different loan programs have different guidelines when it comes to using gift money for a down payment. Here's a quick look at the most common mortgage types and what they allow:

Conventional Loans (Fannie Mae & Freddie Mac)

- Gift funds must come from family members or close relationships.
- If you're putting down 20% or more, the entire down payment can come from a gift.
- If you're putting down less than 20%, you may need some of your own funds if the home is an investment property or second home.

FHA Loans (Federal Housing Administration)

- FHA loans are more flexible. They allow 100% of the down payment to come from gifted funds.
- The gift can come from family, close friends, employers, charitable organizations, or government assistance programs.

VA Loans (Veterans Affairs)

- No down payment is required for VA loans, but gifted funds can be used for closing costs.
- The gift must come from a relative, friend, or charitable organization—not from a lender or seller.

USDA Loans (United States Department of Agriculture)

- Like VA loans, USDA loans don’t require a down payment, but gift money can still be used for out-of-pocket expenses.

Each loan type has slightly different rules, so double-check with your lender before assuming you’re in the clear.

How to Properly Document Gift Money

Lenders don’t just take your word for it when you say money is a gift. They need proof that it’s not a loan. Here’s what you’ll need to provide:

1. A Gift Letter

A formal gift letter is required to prove that the money isn’t expected to be repaid. The letter should include:
- The donor’s name, address, and relationship to the recipient.
- The exact amount of the gift.
- A statement confirming that the money is a gift and not a loan.
- The donor’s signature.

2. Proof of Funds from the Donor

The donor may need to provide bank statements showing they had the funds available before gifting them.

3. Proof of Transfer

A record of the transaction (such as a bank statement or wire transfer receipt) showing the money moving from the donor’s account to yours.

4. Updated Bank Statements

Your bank statements must reflect the deposit and match the amount in the gift letter.

Paperwork might feel like a hassle, but getting these steps right can mean the difference between a smooth loan process and a complete headache.

Potential Pitfalls to Avoid

Even though gift money can make homeownership more achievable, there are a few missteps that could derail your mortgage approval.

1. Accepting Gift Money from an Ineligible Source

Your lender wants to be sure that the money is coming from an approved donor. For example, a seller giving you money for a down payment is a big no-no.

2. Failing to Document the Gift

If you can’t provide proper documentation, your lender might have to assume the money is a loan, which could increase your debt-to-income ratio and potentially ruin your chances of approval.

3. Depositing Large Sums Without Explanation

Lenders scrutinize large deposits that aren’t tied to regular earnings. If you randomly deposit $10,000 into your account without documentation, it could cause unnecessary delays or even loan denial.

4. Overlooking Taxes

Gifted money is generally tax-free for the recipient, but large gifts may have tax implications for the donor. In 2024, individuals can gift up to $18,000 per person per year without triggering a gift tax. Anything above this could affect the donor’s lifetime gift tax exemption.

Tips for Using Gift Money Wisely

Now that you know how to properly use gift money for a down payment, let’s talk strategy.

1. Get Your Gift Early

Receiving gift money well in advance of applying for a mortgage can make the process smoother. Some lenders prefer the money to be "seasoned," meaning it's been sitting in your account for at least 60 days.

2. Use Gift Funds for More Than Just the Down Payment

Gift money isn’t limited to just the down payment. You may be able to use it for closing costs, helping cover additional expenses like lender fees, appraisal fees, and mortgage insurance.

3. Keep Detailed Records

Even after closing on your home, keep a copy of all documentation related to your gift money. You never know when you might need it in the future.

4. Don’t Assume All Lenders Have the Same Policies

Different lenders interpret gift rules differently. Always ask upfront about their requirements to avoid last-minute surprises.

Final Thoughts

Gift money can be a game-changer when it comes to buying a home, but using it correctly requires careful planning and strict documentation. Lenders want to ensure that the money truly is a gift and won’t add any financial burden down the road.

If you’re lucky enough to receive financial help for your down payment, make sure you follow the right steps. Doing so can help you secure a loan without stress or surprises.

Thinking about using gifted funds for your mortgage? Talk to your lender early to understand their specific requirements. A little preparation now can save you a lot of headaches later!