Gift Funds for a Down Payment - Rules for using

Rules for Using Gift Funds for a Down Payment

Knowing what to expect upfront can make the process easier for you and the donor. Getting money for a down payment on a home purchase could be the best gift ever, but there are lender and IRS rules for gifts that you must know to make sure everything goes smoothly.

Here is a rundown

Gifts must be from family members. As an overarching rule, mortgage lenders require gifts for down payments to be from family members. Lenders might make case-by-case exceptions, and if so, will require that the relationship of the non-relative and the other factors of the loan profile be strongly compelling.

For example: If you were receiving down payment gift funds from your godparents and could document that they’ve been close to you and your family all your life, that might be a case certain lenders would accept. The likelihood of a non-relative being accepted as a gift donor is greater if a lender intends to keep that loan on its balance sheet rather than sell to Fannie Mae, Freddie Mac, or some other future investor after the loan closes. Even then, most lenders would still want to see strong income history and career trajectory as well as top-tier credit scores for you as a borrower (these stronger factors of an overall profile that offset a factor where an exception is being made are known as “compensating factors”).

Gift tax is imposed on the donor, not the receiver. When starting the gift conversation with family members, make sure they know that gift tax implications are imposed on the donor. Conversely, you do not have tax implications for receiving the gift. Two main provisions of gift tax law impact donors, and if managed properly, can enable the donor to have no tax liability, even for large gifts.

You may want to look into the Annual gift tax exclusion limit and Lifetime gift tax exclusion limit.
Check the following sources regarding gift taxes:

Franchise Tax Board: https://www.ftb.ca.gov/

IRS: https://www.irs.gov/

Gift donors must provide letter & bank statement to lenders

It is not enough to tell your lender you will be getting gift funds from a family member. Lenders must track gift funds as painstakingly as they track all your other asset and income documentation.


The funds cannot just appear from your family donor, so add this topic to the list of things to talk about upfront. Here are the most important things to know:

  • You and the donor must both sign a lender Gift Letter verifying the funds are in fact a gift.
  • The letter will explicitly ask the donor to verify that the gift is not a loan.
  • Neither you nor the donor writes the letter. The letter will be provided by your lender, and it is the only format that the lender will accept.
  • For most loans, donors must also provide proof of their ability to gift, usually in the form of a bank statement. There are very few exceptions, and your lender can advise on whether it will waive the requirement.


As long as donors know these lender and tax rules upfront, the process is simple.