What Is a Gift Letter for a Mortgage Down Payment?

For some fortunate homebuyers, a friend, family member or employer may decide to give them a substantial sum to help with the downpayment on a home. Parents, grandparents, aunts and uncles, your employer or generous friends may all decide to help out. Whether they're allowed to help you qualify for a mortgage depends on the type of mortgage. 

If you're the recipient of such a gift, you'll need a gift letter to show the lender. This letter certifies that the gift isn't a loan and there is no change to your total debt. It also verifies the donor's relationship to you and their source of funds. 

Knowing the rules to complete a gift letter correctly for a mortgage can help prevent delays to your loan approval. Read on for everything you need to know about a gift letter for a mortgage.

Understanding Gift Letters for Mortgage Down Payments

Gift funds are, as the name implies, money given as a gift rather than a loan or payment for work. These funds are a sort of donation to help you with your home closing costs or downpayment. Gift funds are any funds you receive for a home purchase from someone not directly related to the home purchase nor related to work or other payments.

A gift letter certifies the source of the funds, that they are a gift and where the donor got the funds. If the gift exceeds the IRS’s annual gift tax exemption — $17,000 in 2023 — the giver may need to file a gift tax return.

Different types of mortgages have different requirements for gift letters and filings. It's important to understand gift letter requirements for your property and mortgage types. 

Why Do Gift Letters Matter to Mortgage Lenders?

One common misconception of would-be homeowners is that lenders don't care about the source of funds as long as your down payment is large enough. However, lenders care because they need to confirm that you have the funds to repay the loan. A large deposit in your account without a gift letter can delay or derail the underwriting process of securing your mortgage. 

Lenders use gift letters to verify the source of the funds and the change to your financial status. They want to know that the sudden influx of funds is really a gift, not a loan you'll be paying back in addition to the mortgage. Depending on mortgage criteria, they may also verify the relationship of the gift-giver to you and their source of funds. Lenders use this information in the underwriting process when approving your loan amount and terms. 

How Much Gift Money Can You Receive?

There's no limit on how much gift money you can receive for a mortgage down payment as long as it's for a primary or secondary residence, it's from an approved donor for your mortgage type and you have adequate documentation in the form of a gift letter. However, if you receive $17,000 or more, the gift-giver will need to file a gift tax form with the IRS. 

Gift Letter Rules By Loan Type

Gift letter rules and limits vary by loan type. Here is an overview of gift letter rules and regulations based on the type of loan. 

Conventional Loans

If you get a conventional loan covered by Fannie Mae and Freddie Mac, you can only use gift money that comes from members of your family. Note that biological, adoptive, step and foster relatives all count. Fannie Mae and Freddie Mac defines family members as:

• Spouses
• Parents 
• Grandparents or great-grandparents
• Aunts and uncles 
• Cousins 
• Nieces and nephews 
• In-laws 
• Children 
• Siblings 
• Domestic partner
• Fiancé 
• Godparents (if using Fannie Mae)
• Relatives of your domestic partner (Fannie Mae)
• Former relatives (Fannie Mae)

FHA Loans

With a Federal Housing Administration (FHA)-backed loan, you can receive gifts from almost all family members, like conventional loans. You can't use gift funds from extended relatives like nieces, nephews or cousins.

FHA guidelines allow gifts from close friends if they show a clear interest in your life. This includes family members you’re close with who would otherwise be excluded, such as cousins, nieces and nephews as well as close friends and ex-spouses.

In addition, the FHA guidelines also state that you may receive gift funds from:

• Your employer
• Your labor union
• A charitable organization offering financial assistance
• A government agency or public entity that provides home-buying help to first-time home buyers

That means you can take advantage of government assistance, charitable grants and other offers to help cover your down payment. 

USDA Loans

U.S. Department of Agriculture (USDA)-backed loans don’t have as many restrictions on down payment gifts as either conventional or FHA loans. You can receive gift funds from almost anyone when you buy a home with a USDA loan. 

USDA loans still have some limitations. You cannot accept gift funds from parties who have a vested interest in the sale, this includes:

• The person selling the home you're buying
• Either a person, company or developer who built the home you’re buying
• Your real estate agent or the seller’s agent

VA Loans

Veterans Affairs (VA)-backed loans, like USDA loans, don’t have as many restrictions on down payment gifts. You can receive gift funds from almost anyone when you buy a home with a VA loan, as long as they don't have a vested interest in the sale. These limitations are the same as USDA loans and include:

• The person selling the home you're buying
• Either a person, company or developer who built the home you’re buying
• Your real estate agent or the seller’s agent

Gift Letter Rules By Property Type

There are also gift rules based on whether you are purchasing your primary residence, secondary residence or investment property. While there's no limit to gift money you can use for a down payment for some loans, you might need to contribute a percentage of your own money to your down payment.

Primary Residences

For your primary residence, you have the possibility for the most help. There are no limits on how much of your down payment you can receive from gifts. If you're buying a single-family unit such as an apartment or condo, there are no requirements to use your own money to fund the down payment.

If you're buying a home and have 20% of the loan value for a down payment, you don’t need to use any of your own money. If you're contributing less than a 20% down payment, you'll need to contribute at least 5% down. 

Secondary Residences

Secondary residences have the same rules as primary residences. That means that if you're making a 20% down payment, you don't need to use any of your own funds. If you have less than 20% for the down payment, at least 5% of the loan value in the downpayment will need to be your own funds. 

Investment Properties

Unlike primary or secondary residences, you can't use gift funds to purchase investment properties. 

What Are the Tax Implications of Gift Funds?

The tax implications of gift letters relate to both the gift-giver and the gift recipient. For the gift-giver, if the gift is $17,000 or more, or they have given the recipient a total of $17,000 or more in the year, they will need to file a gift tax letter. In addition, if the gift-giver or the gift recipient lives in a state with an inheritance tax, the home down payment will count toward the lifetime inheritance tax limit. 

Mortgage Gift Letter Template

Your gift letter should include:

• The precise dollar amount of the gift
• The donor’s signed statement that no repayment is expected
• The address of the property associated with the down payment
• The donor’s name, full address and telephone number
• Information about the donor’s account, including the bank or investment company’s name, account number and account type (checking, savings or investment)
• The date the funds were or will be transferred
• The donor’s relationship to the borrower
• The dated signatures of both the gift giver and recipient

Your lender might also give you a template to follow for the gift letter, or you can use this template: 

[Gift donor name, address, phone number and relationship to recipient]

[Gift recipient name and new property address]

[Dollar amount of the gift and date the gift was or will be given]

This gift letter signifies that both the donor and recipient confirm they didn’t receive the gift funds from any person, business or entity that has any interest in the property being sold or any person connected to the transaction. We did confirm we did not receive funds from the real estate agent, builder, developer, mortgage banker, property seller or any entity associated with them. The recipient and donor agree that the gift is not a loan and does not have to be repaid.

Finally, if the recipient will use a portion of the gift for their earnest money deposit or has already used a gift for the earnest money deposit. 

[Your signature] Date

[Donor signature] Date

Using a Gift to Buy a Home

You can use a gift, along with a gift letter, for a down payment on your primary or secondary residence. While there are limitations on how much you can use as a gift on multiunit properties or when you have less than 20% for the down payment, you can still use a gift to make up part of the down payment. 

If you know who will make a gift for a downpayment, you can apply for a mortgage with the type of lender that allows for gifts from that relation, whether it's a friend, family member or employer  Ready to get started? Learn more about the documents you need for mortgage preapproval, and how long mortgage preapproval takes. 

Frequently Asked Questions