The Right Way to Accept Down Payment Gifts: Dos & Don’ts

Did you know that a financial gift from family or friends can be a game-changer when buying a home? Many homebuyers rely on these generous contributions to make homeownership a reality. However, accepting a down payment gift isn’t as simple as depositing a check—it requires careful documentation to prevent complications during the mortgage approval process.

To help you navigate the process smoothly, here’s a breakdown of the essential dos and don’ts when receiving a down payment gift.

✅ DO: Provide Proper Documentation

Lenders need proof that the money you receive is truly a gift and not a loan that must be repaid. That’s why a gift letter is essential—it verifies the source of the funds and ensures compliance with loan regulations.

What Should a Gift Letter Include?

• The donor’s full name, address, and relationship to you.
• The exact amount being gifted.
• A clear statement that the funds are a gift with no repayment required.
• Signatures from both the donor and the recipient.

Example:

If your parents give you $10,000 for your down payment, they’ll need to sign a letter confirming it’s a gift. Your lender may also request additional proof, such as a bank statement showing the donor had the funds available before transferring them.

❌ DON’T: Deposit Large Sums Without a Paper Trail

Unexplained deposits can raise red flags with lenders. Since mortgage lenders need to verify that your down payment funds come from a legitimate source, cash deposits without proper documentation can create delays or even jeopardize your loan approval.

How to Avoid Issues:

• Use a check or direct bank transfer instead of cash.
• Keep detailed records, such as copies of checks, transfer receipts, and bank statements.
• If possible, have the donor transfer funds directly to your bank account several days before they are needed.

Why It Matters: If a lender cannot trace where the funds came from, they might question whether the money is actually a loan, which could affect your mortgage terms or approval.

✅ DO: Know Who Can Give You a Down Payment Gift

Not all loan programs allow gifts from just anyone. While most programs accept gifts from close family members, some have restrictions on gifts from friends, employers, or distant relatives.

Loan Program Guidelines:

• Conventional Loans: Usually require the gift to come from a close family member.
• FHA Loans: Allow more flexibility but still require documentation proving the donor’s relationship to you.
• VA Loans: Permit gifts but may require extra verification.

Example:

A gift from your parents or siblings is generally acceptable, while a gift from a friend or distant cousin might not meet the lender’s requirements. Always confirm with your lender before accepting any financial assistance.

❌ DON’T: Assume the Gift Can Cover Everything

Some mortgage programs allow the entire down payment to be covered by a gift, while others require buyers to contribute some of their own funds.

Common Restrictions by Loan Type:

• FHA Loans: The full down payment can come from a gift.
• Conventional Loans: Some may require you to contribute a percentage of your own funds, especially if you have a lower credit score.

Example:

If you’re using an FHA loan, your family can cover the entire down payment with a gift. However, if you’re applying for a conventional loan, you might need to contribute at least 5% of the purchase price yourself.

Additional Tips to Keep in Mind

📌 Communicate Early with Your Lender

Let your lender know about the gift as soon as possible. They can guide you through the documentation requirements and prevent any last-minute surprises.

📌 Be Aware of Tax Implications

The IRS allows individuals to gift up to $17,000 per person (as of 2024) without triggering a gift tax. If a donor gives more than that amount, they may need to file a gift tax return. It’s best to consult a tax advisor for clarification.

📌 Keep All Records Organized

Save copies of the gift letter, bank statements, and any transfer receipts. If your lender requests proof at any point, having this documentation ready will make the process much smoother.

Why Following These Rules Matters

Skipping any of these steps can lead to delays, extra scrutiny, or even a denied mortgage application. By ensuring proper documentation, maintaining a clear transaction history, and understanding your loan’s guidelines, you can avoid unnecessary complications and move confidently toward closing on your new home.

Thinking about buying a home and need guidance? Reach out today to get expert advice on navigating the mortgage process!

Our team at CENTURY 21 Keim Realtors and CENTURY 21 Country Lake Homes is here to help anywhere in Eastern Pennsylvania, New Jersey and Delaware!  Email at c21keim@gmail.com or call us at 800-648-4421.