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For many homebuyers, coming up with a down payment is the biggest obstacle to homeownership. A 2024 report from the National Association of Realtors (NAR) finds that the median down payment is 18% of the purchase price, which works out to $18,000 for every $100,000 of a home's price. That's a tidy sum, especially for first-time homebuyers who don't have home equity to access for a down payment.
If saving enough for a down payment is challenging, you might consider turning to a family member or friend for financial help. According to NAR's data, 20% of homebuyers between the ages of 25 and 33, and 14% of those ages 34 to 43, received a financial gift from a relative or friend for a down payment.
If you receive money as a gift to help with a down payment or closing costs on a new home, you may need to present your lender with a gift letter. Here's what you need to know.
What Is a Gift Letter for a Mortgage Lender?
A gift letter is a legal document stating that funds you received from a relative or friend are a personal gift and not a loan. The donor is generally required to sign the gift letter.
A gift letter allows lenders to confirm that funds come from a legitimate source when underwriting a loan. Lenders require gift letters because they need to ensure that the buyer won't have to repay the gifted funds, which could hinder the applicant's ability to repay their mortgage.
When Do You Need a Gift Letter?
Generally speaking, lenders want you to complete a gift letter for any gifts that exceed 50% of your total household monthly income for conventional and jumbo loans, as well as government-backed Veterans Administration (VA) loans. In other words, if you earn $6,000 each month from your job, you'll likely need to provide a written explanation for gifts you receive over $3,000.
The threshold is lower for loans guaranteed by the Federal Housing Administration (FHA) and the U.S. Department of Agriculture (USDA). For these types of loans, you'll need a gift letter for any deposit exceeding 1% of the adjusted purchase price or appraised value of the home, whichever is higher.
A gift letter usually isn't required if the gift money has had time to become seasoned. Seasoned funds refer to money that's been in your bank account long enough that it doesn't require special documentation. For underwriting, that commonly means the funds have been in your account for at least 60 days.
What to Include in a Mortgage Gift Letter
A gift letter should include the following:
- The amount of the gift
- The date you received the gift
- The address of the property you're purchasing
- Your relationship to the donor
- The donor's name and contact information
- The donor's bank account information
- A statement that the gift is not a loan and there is no expectation of repayment
- Signatures from yourself and the donating party
Be sure to check with your lender to find out what specific requirements you'll need to meet.
Gift Letter Template
Now that you know what you must include in a gift letter, here's a gift letter template to illustrate what such a letter might look like. (The following template is for informational, not legal, purposes.)
I [DONOR NAME], hereby certify that on [DATE] I gave/will give a gift of $[AMOUNT] to [RECIPIENT NAME], my [RELATIONSHIP (examples: "friend" or "child")].
This gift is to be used towards the purchase of the property located at [PROPERTY ADDRESS].
I further certify that no repayment is expected, either through cash payment or services from the recipient, or otherwise.
[BANK NAME]
[TYPE OF ACCOUNT]
[ACCOUNT NAME]
[DONOR'S NAME]
[DONOR'S FULL ADDRESS]
[DONOR'S TELEPHONE NUMBER]
By signing this document, I/we hereby certify that funds given to the homebuyer were not provided by any person, business or entity with an interest in the sale of the property, or who is connected to the transaction. Additionally, the donor and the recipient agree that the gift does not have to be repaid.
[DONOR'S PRINTED NAME]
[DONOR'S SIGNATURE AND DATE]
[RECIPIENT'S PRINTED NAME]
[RECIPIENT'S SIGNATURE AND DATE]
Who Can Gift Money for a Home Down Payment?
Restrictions on who's allowed to gift you down payment funds depend on what type of home loan you're applying for.
- Conventional mortgages: Fannie Mae and Freddie Mac conventional mortgages will only accept gift letters from members of your family.
- Government-backed mortgages: Government-backed loans tend to have more lenient gift requirements. With an FHA, VA or USDA loan, you could receive a monetary gift from a friend, employer, charity or another person who is not a member of your family.
While USDA and VA loans allow you to receive funds from almost anyone, exclusions exist for those with a vested interest in the purchase of the property, such as:
- The current owners of the property
- The builder or developer of the home you're purchasing
- Real estate agents representing the buyer and the seller
Learn more >> Rules for Giving and Receiving Home Down Payment Gifts
How Much Money Can You Receive as a Gift for a Down Payment?
Broadly speaking, there is no set limit on how much money you can receive as a gift for a down payment. That said, some lenders will want an explanation for large cash gifts.
Zooming in, guidelines for down payment gifts vary depending on the type of property you're purchasing:
- Primary residence: If you're purchasing a single-family home as your primary residence, your entire down payment can come from gift funds. Similarly, you can completely fund your down payment on a multi-unit home with gift funds if you make a down payment of at least 20%—otherwise, at least 5% must come from your own funds.
- Secondary residence: If you're buying a second home, you can fund your entire down payment with a cash gift if your down payment is 20% or higher. If your down payment falls below 20%, then at least 5% of it must be your own money.
- Investment property: Cash gifts are not allowed for the purchase of investment properties.
Learn more >> What Can I Use for a Down Payment on a Home?
How Do Gifts for Mortgage Expenses Affect Taxes?
As a gift recipient, you typically shouldn't have to pay taxes on the funds. By contrast, the gift-giver may have to pay taxes, depending on the size of their donation. The annual gift exclusion for the tax year 2024 is $18,000 (and $19,000 for the tax year 2025). That means your donor will need to file a gift tax return if their gift exceeds that amount.
Bear in mind, tax laws change regularly, so you'll want to consult your tax professional before you give or receive a cash gift for a down payment.
Learn more >> What Is the Gift Tax?
Don't Forget Your Credit Score
One of the biggest challenges to purchasing a home is coming up with a down payment, and a gift from a relative or friend can help. Still, the down payment is just one of many puzzle pieces in the homebuying process. You may need to meet specific minimum credit score requirements to qualify for a mortgage loan, which can vary depending on the loan type.
The interest rate on your home loan is another important factor since a lower interest rate means a lower monthly payment. Maintaining good credit is essential if you want a low interest rate, as lenders tend to offer their best rates to borrowers with the highest credit scores. Remember, even a minor interest rate reduction could potentially save you thousands of dollars over the life of your loan.
It's wise to take time to build your credit before applying for a mortgage to improve your chances of approval for a loan with favorable terms. You can start by checking your credit report and credit score for free to discover where your credit stands.