Down Payment Gift Letter: Definition, Rules, Template

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Mortgage lenders need documentation for large deposits in your bank account. For gifted funds, this means providing a gift letter.
A gift letter should include the name and contact information of the donor and a statement that no repayment is expected.
Who's allowed to gift you funds for a down payment and how much they can give depends on your loan type and how the property you're purchasing is classified.

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Saving enough for a down payment is often the biggest hurdle first-time homebuyers face. To overcome this, many look to loved ones to help them fill the gap between what they need and what they have saved.

In 2019, 32% of first-time homebuyers received a gift or loan from a relative or friend toward their down payment, according to a 2020 report from the National Association of Realtors.

For most types of mortgages, you're allowed to use gift funds to source your down payment. You just might need a bit of documentation to back it up.

What is a gift letter for a mortgage?

A mortgage gift letter is a statement written by the person who gifted you the funds that confirms that the money is a gift and that repayment is not expected. The gift letter should contain information about the gift donor and their relationship to the recipient.

When you apply for a mortgage, lenders scour your financial information to ensure you have the funds to make your down payment and that you have the income to afford your monthly payments. As part of this process, you'll generally provide your lender with two months' worth of bank statements.

If it notices any large, out-of-the-ordinary deposits into your bank account, it'll want to know where that money came from. Lenders do this to make sure that:

1. You aren't using a loan for your down payment, which would change the circumstances of your mortgage approval and potentially make it harder for you to afford your monthly mortgage payments.

2. The money is from an acceptable, non-fraudulent source.

"The gift letter acts as an affidavit that the funds are gifted and not loaned to the borrower," says Melissa Cohn, regional vice president of William Raveis Mortgage.

Do you need a gift letter for seasoned funds?

If lenders ask only for the previous two months bank statements, does that mean any deposits made prior to that are in the clear? In general, yes. Once money has been in your bank account for a certain period of time, it's considered "seasoned."

"If the borrower can show two months of bank statements with no large deposits, then the money is seasoned and no gift letter is required," Cohn says.

But keep in mind that even if you aren't asked to provide a gift letter, you still need to be truthful with your lender when answering questions about your finances. Lying on a mortgage application constitutes mortgage fraud.

Down payment gift rules

When it comes to the source and amount of the funds you're receiving, the rules on what's allowed differ depending on the type of mortgage you get.

None of the loan types listed here allow those who have a financial interest in the transaction (such as your real estate agent or the seller) to gift you funds for a down payment.

Conventional mortgages

If you're getting a conventional mortgage backed by government-sponsored enterprises Fannie Mae or Freddie Mac, you'll only be able to receive gift funds from relatives. This includes:

A spouse, fiance, or domestic partner
A child or other dependent
Someone you're related to by blood, marriage, adoption, or legal guardianship

If someone you aren't related to, such as a close friend, is planning to gift you money for a down payment, you'll need to deposit those funds a few months before you apply for a mortgage, to ensure they're properly seasoned.

In some cases, there may be limits on how much of your down payment can come from another source. If you're purchasing a second home, for example, a certain portion of your down payment may need to come from your own funds.

Your entire down payment can be funded using a gift if you're purchasing one of the following:

A one-unit principal residence
A two- to four-unit principal residence if you make a down payment of 20% or more
A second home if you make a down payment of 20% or more

If you're purchasing a two- to four-unit principal residence or a second home with a down payment that's less than 20%, you'll need to contribute at least 5% of the property value from your own funds. Gift funds can't be used to purchase an investment property.

Government-backed mortgages

If you're getting a mortgage backed by a government agency, the rules are slightly different.

For FHA mortgages, which are backed by the Federal Housing Administration, the list of people who can contribute to your down payment is a little longer than it is with conventional loans.

Acceptable down payment donors on FHA mortgages include:

Relatives
Your employer or labor union
A close friend with a "clearly defined and documented interest in the borrower"
Charitable organizations
Government agencies or public entities that provide assistance to low- to moderate-income families and first-time homebuyers.

USDA mortgages and VA mortgages are even more lenient. Like with the other loan types listed here, you can't receive gift funds for your VA or USDA down payment from parties with a financial interest in the transaction. Other than that, there are no rules restricting where your gift can come from.

With all of these government-backed mortgages, there's no minimum borrower contribution requirement; your entire down payment can come from gift funds.

How to write a gift letter for a mortgage

The main piece of information your lender is looking for in a gift letter is a statement from the donor that the funds are a gift, and that you aren't expected to repay them. They want to be certain that the funds you're receiving aren't a loan, since a loan typically can't be used for a down payment.

Your lender may provide you with a template of what they want the letter to include. This will likely include:

The donor's name and contact information
Their relationship to you
The date the gift was or will be given
Statement that the funds are a gift, repayment is not expected, and none of the funds were given by someone with an interest in the transaction.
Address of the property being purchased
Information about the account the gift came from
Signatures of both the donor and the recipient

Mortgage gift letter template

Confirm with your lender all the information it needs your donor to include in their letter. When your donor writes their letter, it should look similar to this:

[Donor name, address, phone number, and email address]

I [donor name] hereby certify that I am making a gift of $[gift dollar amount] to [name of recipient], who is my [relationship to recipient]. These gift funds were transferred on [date of transfer].

This gift is to be applied toward the purchase of the property at [address of the property being purchased]. I certify that repayment of this gift is not expected or implied. These gift funds were not made available to the donor from any person or entity with an interest in the sale of the property (including the seller, real estate agent or broker, builder, loan officer, or any entity associated with them).

[Donor and recipient signatures and date]

Gift letters and tax consequences

As the recipient, you generally don't need to worry about tax consequences when receiving gift funds for a down payment. But you may want to make sure your donor knows that if they give you a large enough sum, they'll need to report it to the IRS.

For 2021, the annual exclusion for gifts was $15,000. In 2022, it's $16,000. If your donor gives you less than this, they likely don't need to disclose their gift. If they give you more, anything they give you beyond the annual exclusion will need to be disclosed to the IRS. But even if it crosses that threshold, they likely won't need to pay taxes on it; the amount will just be deducted from their lifetime gift tax exemption.

Molly Grace

Mortgage Reporter

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