If you recently received inheritance or gift from a relative or have been offered a gift towards down-payment for buying a home, you have come to the right place! This post covers the guidelines and rules around using gift funds (or even equity) as down payment for a home purchase.
Fanniemae defines acceptable donors as:
– a relative defined as spouse, child, or other dependent who is related to the borrower by blood, marriage, adoption or legal guardian ship
– a non-relative that share a familial relationship with borrower defined as a domestic partner, individual engaged to marry the borrower, former relative, or godparent.
– the donor may not be or affiliated with the builder, developer, real estate agent, or any other interested party to the transaction. Please see fanniemae guidelines for additional clarity.
If you are purchasing or refinancing a primary or secondary residence (home you live in or vacation home that isn’t rented long term) with a conventional loan, you can use gift funds to cover down payment, closing costs, discount points, and reserves. If it is a single unit those gift funds can cover all of the down payment and closings costs and there is no minimum required borrower contribution of funds. If you purchase a 2–4-unit residence and you want to put less than 20% down, it is required that you contribute a minimum 5% of the purchase price towards down payment and closing costs. Please refer to Fanniemae’s guidelines on the subject for further information.
If you are purchasing an investment property with a conventional loan, gift funds are not acceptable. When using a conventional loan (Fanniemae of Freddiemac) to purchase an investment property, any funds that are used for down payment, closing costs, or reserves need to be in an account in your name and seasoned for the previous sixty days. This means that the previous 60 days of bank statement activity will be reviewed for any deposits. An underwriter will need to verify any deposits that are larger than 50% of your gross monthly income. For more details, please see Fanniemae’s guidelines on the subject.
While conventional guidelines do not permit gift funds on investment property purchases there are portfolio products that consider gift funds an acceptable source of down payment. These products don’t have the same rates and terms as conventional products but could be a viable option!
In addition to gift funds gift a gift of equity can be granted from the seller to the buyer as long as the seller is considered an ‘acceptable donor’. This equity can be used to fund all or part of the down payment, closing costs, prepaids, and discount points. It cannot be used as financial reserves. For example, if you wanted to purchase your mom’s investment property as a primary residence to live in and she had had enough equity she could cover your down payment, closing costs, and even buy down your rate. Theoretically you would bring in zero dollars to complete the transaction and Mom would still be paid out the net of funds (purchase price – gift of equity – title fees/closing costs).
Tax ramifications of gift funds. Please note that I am not a CPA and I do not give tax advice. Please consult a CPA if you have any questions about tax ramifications. As a gift receiver you are not subject to any sort of gift tax. If your parents/relatives are concerned about paying gift taxes please refer them to the IRS gift site. For 2025 you are able exclude $19,000 in gifts to each of your children once per year. This means you don’t need to record it in your long-term gift tax ledger. If both your parents and your spouses’ parents are married, they can both give you each $19,000 for a total of $152,000 between the four of them without needed to inform the IRS. And they can give you more, if needed without necessarily being taxed as long as they are under the $14M lifetime limit ($28M for married filing jointly). Please be mindful that in addition to federal taxes there are also state taxes that can be imposed on gift funds.
Best practice for transferring gift funds. When transferring gift funds, it is best practice for the donor to wire the funds directly to title (please make sure to verbally confirm the wiring instruction directly with your escrow officer) during the transaction. This avoids any need to view donor’s bank statement. If funds are transferred from the donor’s bank account into your account before close the underwriter will have to review all of the fund’s transfers, statement showing funds leaving donor’s account and statement showing funds entering receiver’s account. In both scenarios the receiver and the donor will need to sign a ‘gift letter’ stating that the funds are a gift, the amount, the date, the relationship of the parties, and that no repayment is required. Alternatively, the donor could also transfer the funds 60 days before the transaction.
If you have any questions about gift funds, please feel free to contact me!