How to Use Gift Funds for a Down Payment

Saving for a down payment is one of the biggest hurdles to homeownership. Even if you can comfortably afford a mortgage, coming up with thousands upfront can feel out of reach. That’s where gift funds come in. A gift fund is made of money given by family, friends, or organizations to help cover your down payment or closing costs.

In this guide, we’ll explain who can gift money for a mortgage, what the allowance is, what documentation you need, and what other down payment assistance programs exist.

Who Can Donate to a Gift Fund?

A gift from an eligible source can give you that extra push into your dream home, and that’s why it isn’t uncommon for home buyers to receive gift funds. There are a few rules and guidelines that apply to who may contribute to your gift fund.

Depending on the type of mortgage you choose, the most common sources include:

• Relatives
• Close friends
• Employers
• Charitable organizations
• Government agencies
• Public entities that assist low-income/ first-time home buyers

The gift donor cannot be a person with an interest in the sale of the property, including:

• the seller
• real estate agent
• broker
• builder
• any other associated person

What is a Gift Letter?

So, you have a gift fund donor, that’s great! However, gift funds must be documented so your lender can confirm the source of the money. This is in order to ensure that this money is a true gift and not a loan in disguise. Loans can affect your DTI (debt-to-income ratio).

Your donor must send your lender a mortgage gift letter accompanied by a “paper trail” to back it up.

• The dollar amount of the gift
• The transfer date of the funds
• A statement of no expectation for repayment
• The donor’s name, address, phone number, and relationship to the borrower

The accompanying paper trail should include a copy of the donor’s withdrawal and borrower’s deposit slips – or something similar.

How Much Money Can You Receive in a Gift Fund?

The amount of money you can receive as a gift depends on the type of mortgage you’re borrowing. Some mortgage programs limit the amount that you can use towards a down payment, closing costs, and other fees. You are only able to use a gift fund on primary or second homes, not investment properties.

• Conventional Loans – all of your down payment may be gifted if you’re putting down 20% or more. If you’re putting down less than that, part of the money can be a gift, but 5% must come out of your own pocket.
• FHA or VA Loans – the entire down payment can be gifted unless your credit score is below the minimum of 620.

Frequently Asked Questions (FAQ)

Who can give a down payment gift?

Eligible donors include relatives, close friends, employers, and charitable organizations. The seller, real estate agent, or builder cannot provide gift funds.

How do I prove a gift isn’t a loan?

You’ll need a mortgage gift letter and bank statements showing the transfer of funds from the donor to you. The letter must clearly state that no requirement for repayment.

Can I use gift funds for closing costs?

Yes. Gift funds can usually cover down payment, closing costs, and prepaid expenses, depending on your loan type.

Do I have to pay taxes on gift funds?

Typically, the donor may need to report the gift if it exceeds the IRS annual gift tax exclusion limit ($18,000 per person for 2025). However, most family gifts fall below that threshold.

Can I combine gift funds with a down payment assistance program?

Yes, many loan programs allow you to combine gift funds with DPA grants or forgivable loans, as long as both are documented properly.

Whether you’re using a gift fund, applying for down payment assistance, or exploring both, our team at First Heritage Mortgage can guide you through every step.

Contact a loan officer today to learn what programs you qualify for and how to structure your down payment the right way.