The Dos and Don’ts of Receiving Down Payment Gifts from Family & Friends

Did you know that receiving a down payment gift from family or friends can be a game-changer in your home buying journey—but only if you follow a few crucial rules? For many buyers, financial assistance can make homeownership a reality, but failing to comply with lender requirements can cause delays or even jeopardize your loan approval.

With The Red Team, we’re here to guide you through the process and ensure everything is handled correctly. Here’s what you need to know about the dos and don’ts of down payment gifts:

✅ DO: Document the Gift Properly

Lenders require thorough documentation for any financial gift used as a down payment. This typically involves providing a “gift letter” that confirms the funds are a gift and not a loan.

What to Include in a Gift Letter:

  • Donor’s name, address, and relationship to the homebuyer
  • Exact gift amount
  • A statement confirming the gift does not need to be repaid
  • Both donor and recipient signatures

Example: If your parents gift you $10,000, they must provide a signed letter stating it’s a gift with no repayment expected. Lenders may also require proof of the donor’s ability to give, such as a bank statement.

❌ DON’T: Deposit Cash Without Proof

Depositing large sums of cash without documentation can raise red flags with lenders. It’s crucial to ensure all funds are traceable and legitimate.

Tips to Avoid Issues:

  • Use checks or direct bank transfers instead of cash.
  • Keep copies of checks, transfer receipts, and bank statements.
  • Make sure the donor’s funds remain in their account for several days before transfer.

Why It Matters: Undocumented funds can delay the process or even risk loan approval. Maintaining a paper trail helps keep things smooth and stress-free.

✅ DO: Understand Gift Giver Eligibility

Different loan programs have specific guidelines regarding who can provide a down payment gift. Generally, close family members are acceptable, but friends or distant relatives may not always qualify.

Loan Program Guidelines:

  • Conventional Loans: Typically allow gifts from close family members.
  • FHA Loans: More flexible but require documentation of the relationship.
  • VA Loans: Usually permit gifts, but may require additional verification.

Example: A gift from a sibling or parent is usually acceptable, but one from a friend might not meet lender criteria. Always check with your lender beforehand.

❌ DON’T: Assume Any Amount Can Be a Gift

While some loan programs allow the entire down payment to be a gift, others require you to contribute a portion of your own funds.

Common Restrictions:

  • FHA Loans: Allow the full down payment to be gifted.
  • Conventional Loans: May require you to contribute a percentage from personal savings.

Example: With an FHA loan, your parents could gift the entire down payment. However, some conventional loans may require you to contribute at least 5% of the purchase price.

Additional Tips to Keep in Mind

  • Communicate Early: Inform your lender about the gift as soon as possible to ensure all documentation is in place.
  • Understand Tax Implications: Large gifts may have tax consequences. The IRS allows individuals to gift up to $17,000 per year (as of 2024) without triggering a gift tax. Consult a tax advisor to double check.
  • Stay Organized: Keep copies of all related documents to provide proof if requested by the lender.

Why Following These Rules is Essential

Ignoring these guidelines can lead to delays, additional scrutiny, or even denial of your loan application. Proper documentation and adherence to lender requirements will help ensure a seamless path to closing.

Need Help Navigating the Homebuying Process?

The Red Team is here to assist with every step of your real estate journey, ensuring a hassle-free experience. Contact us today for expert advice and guidance!