Getting Started with Gift Funds in Conventional Loan Approval

Did you know gift funds can pay for the down payment and closing costs.

Present with gift fundsGift money is an excellent source of funds for your down payment and closing costs on a home purchase. Today's purchasers often get cash down payment presents. The likelihood of receiving a monetary gift is highest for first-time homebuyers, although repeat and move-up purchasers may still get one.

But if someone gives you money as a gift, there are rules you should follow to ensure that the money goes toward the down payment or closing costs.

First, make sure that the gift is unconditional. This means that you don't expect anything in return other than the satisfaction of knowing that you helped someone achieve their dream.

Gift money is a great way to get money for a down payment and other costs when you buy a home.

Fannie Mae Gift Funds Guidelines

A conventional mortgage is a loan program not insured by FHA, VA, or any other agency. Conventional mortgage loans can also be referred to as "non-government" loans. If you intend to use gift money for your down payment and closing costs, there are a few rules you should abide by.

Who Can Donate Gift Funds?

Gift funds must come from an acceptable donor. The Federal National Mortgage Association (Fannie Mae) permits the following individuals to gift money:

  • A relative is connected to the borrower through blood, marriage, adoption, or legal guardianship.
  • Or a domestic partner, fiancĂ©, or fiancĂ©e.
  • Charitable organizations are permitted to provide gift funds for the mortgage down payment.

It is illegal for the donor to be the developer, builder, real estate agent, or any other interested party in the transaction, nor to be affiliated with any of these parties.

Conventional Loans Gift Funds Requirements

Before, the homebuyer had to put up 5 percent of their own money and gift money to pay for the house. Federal Home Loan Corporation (Fannie Mae and Freddie Mac) got rid of this rule, which is good news.
The donor can now contribute the entire down payment to assist the borrower with the purchase.

The gift fund standards include a few minor exclusions. Regardless of the down payment, the regulation change allows for limitless gift monies. The modification affects primary residences and second houses with one to four units.

If the down payment is less than 20%, the borrower must put down at least 5% of the purchase price from their assets when buying a primary residence with two to four units or a second house. (5%) to (19%).
Gifts can augment the down payment, closing expenses, and reserves once the minimum borrower contribution has been satisfied.

Donors Need To Complete Gift Funds Letter Provided By Lenders

Most lenders require a verified, detailed gift letter. The donor and the borrower must sign this letter and send it to the lender with your mortgage application.

The lender will review the letter, verify the amount of funds given as a gift to the borrower, and then disburse those funds to the borrower at the closing table. The letter should contain the following information:

  • state the amount of the gift
  • the date of the transfer of funds
    include a statement from the donor saying they don't expect anything in return.
  • Name, address, telephone number, and relationship to the borrower of the donor.

When the borrower's financial resources are combined with a gift from a family member or domestic partner to meet the minimum cash down payment requirement, the requirements must be met:

  • A letter attesting that the donor has spent the last year living with the borrower and would continue to do so at the new residence.
  • Documents demonstrating a history of joint habitation between the borrower and the donor. Donor and borrower addresses must match.
  • Acceptable documents include a copy of a driver's license, a bill, or a bank statement.

The mortgage lender will provide a gift letter template to help with the transfer.

Verification of Gift Funds for a Conventional Mortgage

  • a duplicate of the donor's check and the borrower's deposit slip
  • give the closing agent a copy of the donor's check, or
    a receipt for the donor's check on a settlement statement
  • a copy of the withdrawal slip from the donor and the deposit slip from the borrower

If the money is transferred after settlement, the lender must demonstrate that the donor sent the closing agent a certified check, a cashier's check, or another formal check. Cash gifts are not accepted.

Don't Commit Loan Fraud

Typically, we offer gifts to someone we care about, and we would not want them to feel obligated to repay us for our kindness.

Using Your Gift Funds With a Conventional Loan

Conventional loans are available to most borrowers and are not guaranteed by the federal government.

A conventional loan is easier to obtain than many people assume. The key to qualifying for a conventional loan is ensuring you have a strong credit score, good income, and sufficient money for a down payment and closing costs.

If you have gift funds, you're using for your down payment; you must have a plan for using those funds. If you follow the above-mentioned gift fund guidelines, you can use gift money for your down payment and closing costs when getting a conventional loan.

Investment Property Gift Funds

You can't use gift money to put down on an investment property. If you want to buy real estate to make money off it, you'll have to pay the down payment with your own money.
Learn about  Investment Properties

Gift Funds for a Second Home Loan

There is no requirement for a minimum borrower contribution from the borrower's cash. All monies required to complete the transaction can be provided as a gift when the down payment exceeds 20%.
In the case of a down payment of 5%, 10%, or 15% or less, the borrower must contribute at least 5% of their funds. Gifts may be used for the down payment, closing fees, and reserves after the minimum borrower contribution.
Learn about Second Homes

Is a Gift for a Home Purchase Taxable?

This is a question that commonly comes up among borrowers who receive gift money from their parents for their first home down payment.
IRS does require gift tax over annual exclusion. As of 2023, the annual exclusion is $16,000. If the gift exceeds the annual exclusion, and the donors are the borrower's parents, the parents can write two checks to the home buyer. That covers up to $32,000. 

FAQs About Gift Funds for a Conventional Loan

Q. If Someone Gives Me Money, Why Do I Need A Gift Letter?
A. Lenders actively monitor gift money to guarantee that a present is a gift, not a loan. Suppose money must be repaid, which would be deemed debt. In that case, it may significantly impact the debt-to-income ratio lenders use to evaluate a prospective borrower's financial situation.

Q. Can Gift Funds Be Used For Closing Costs And Reserves?
A. Yes, gift funds can be used for closing costs and reserves. The gift letter from the donor must specify that the monies are a gift, not a loan.

Q. Can You Use Gift Money for Any Loan Program?
A. Gift money can be used for any type of loan program, including the FHA loan, VA loan, and USDA loan program. The lender will need to verify that the gift funds are coming from a family member or close friend and that there is no expectation of repayment.

Q. People who can't give you gift money
A. Interested parties in the transaction, such as the real estate agent, builder, developer, etc., are prohibited from providing gift funds.

Q. How much money can be gifted for a down payment?
A. The amount of money that can be gifted for a down payment depends on the lender and the loan program. Most lenders will allow the entire down payment to be gifted, while other lenders may limit the amount that can be gifted. It's important to check with your lender to see what their requirements are.

Q. What Are Gift Funds?
A. Gift funds are monetary gifts given to a person for a specific purpose. Gift funds are not loans and do not need to be repaid.

Q. Why Do Lenders Care About Gift Letters For Mortgage Down Payments?
A. Lenders are worried about gift letters for down payments on mortgages because they want to ensure that the money is a gift, not a loan. They also want to ensure that the person giving the gift has the financial means.


In conclusion, a gift fund can be a great way to get a conventional loan, and it can help you avoid having to provide a sizeable down payment or pay for private mortgage insurance. However, it's important to understand the rules and regulations of using a gift fund to get a loan. Be sure to consult with a loan officer to determine if using a gift fund is the right option.

Personal Gifts