What to Know if You’re Using Gift Money for a Down Payment: Rules to Follow

Key takeaways

• Mortgage down payment gift rules allow family members and close relatives to help buyers with home purchases.
  
• Lenders require a gift letter documenting the source and amount of gift funds.
  
• IRS gift tax rules set annual and lifetime limits for tax-free giving.
  
• Gift money can’t come from anyone with a financial interest in the sale.
  

Buying a home is one of the biggest financial steps most people will ever take. With the U.S. median home price hovering around $420,000 as of 2023 (National Association of Realtors), saving for a down payment can feel overwhelming. For many buyers, especially first-timers, help from family or friends makes the dream possible. But before accepting gift money, it’s important to understand the mortgage down payment gift rules required by lenders and the IRS.

What are the mortgage down payment gift rules?

Mortgage down payment gift rules outline how funds given by someone else can be used toward your home purchase. Lenders want to ensure the money is truly a gift—not a loan that adds hidden debt. Documentation is required to verify this.

Most lenders allow gifts to cover:

• All or part of the down payment
  
• Closing costs
  
• Reserves (in some cases)
  

Who can give a down payment gift?

Gift money must typically come from someone with a close personal connection. Most lenders accept funds from:

• Parents or grandparents
  
• Siblings or children
  
• A fiancé, fiancée, or domestic partner
  

Funds usually can’t come from:

• Friends without a close relationship
  
• The home seller
  
• Real estate agents, builders, or anyone with a financial stake in the sale

How much can be gifted for a mortgage down payment?

There is no universal lender cap on how much can be gifted, but the IRS sets rules for tax-free giving:

• Annual exclusion limit (2023): $17,000 per giver, per recipient
  
• Lifetime exemption: $12.92 million
  

This means a parent can give a child up to $17,000 without filing a gift tax return. Larger gifts are allowed, but the donor may need to file IRS Form 709.

Mortgage gift letter requirements

Every lender will ask for a gift letter confirming that the money is a gift. The letter must include:

• Donor’s name, contact information, and relationship to the buyer
  
• Exact dollar amount of the gift
  
• The date the funds were transferred
  
• A statement that the money is not a loan and does not need to be repaid
  

Tip: Ask your lender if they have a template you can use. Many provide a standard form.

Pros and cons of using gift funds

Pros

• Reduces the amount buyers must save themselves
  
• Can help buyers qualify for better loan terms
  
• Makes homeownership possible sooner
  

Cons

• Requires extra documentation and lender approval
  
• Large gifts may trigger IRS reporting requirements
  
• Not all loan types accept unlimited gift funds
  

Frequently asked questions

Can gift funds cover closing costs?
Yes. Many lenders allow gift money to be used for closing costs, but check your specific loan program.

Is gift money taxable for the buyer?
No. If taxable, the gift is the responsibility of the giver—not the recipient.

Do all lenders accept gift funds?
Most major lenders do, but restrictions vary by loan type (conventional, FHA, VA). Always confirm before transferring funds.

The bottom line: Your path to homeownership with gifted funds

Gift funds can make buying a home far more achievable, but it’s important to follow the rules. Lenders require proof that the money is a gift, and the IRS has limits on tax-free giving. With proper documentation and planning, a mortgage down payment gift can help you unlock homeownership sooner.

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