Determining the down payment amount

Before we get into gift funds, let’s first look at how much a “typical” down payment might be. This amount varies widely and depends on the home’s purchase price. 

Say you’d like to purchase a home with a price tag of $250,000. In this case, you’d need: 

• $7,500 for a 3% down payment 
• $25,000 for a 10% down payment 
• $37,500 for a 15% down payment 
• $50,000 for a 20% down payment 

Even a 3% down payment, the minimum many lenders will allow, is a large investment. If you even have that much to begin with, you may have other priorities for some of that money – investments, furnishings and improvements for your new home, or a fund for home maintenance or emergencies. Check out our down payment calculator to run your own numbers and view different scenarios that demonstrate how various down payment amounts affect your savings and ability to buy a home sooner rather than later. 

A down payment solution: Gift funds 

Money gifted to you could be a viable way to put a dent in that down payment amount needed to get a mortgage loan. Depending on the type of loan, many lenders will allow you to use money gifted to you by family as part of your down payment. If you have family members who can help support you financially, you could use gift funds as down payment money so you can buy a home sooner. If you’re wondering who falls under the category of "family," it varies depending on the loan program. Check with your lender to be sure.

What gift funds can be used for and who can provide those funds

Here are some things to keep in mind if you plan on using gift funds for your down payment: 

• Gift funds can be used for the down payment, closing costs and interest points. Many lenders will allow you to use gift funds to cover the entire amount of the down payment, depending on your credit score and their loan underwriting guidelines 
• If you’re getting a conventional loan through Fannie Mae or Freddie Mac, gift funds must come from family. Other loan programs may have different restrictions – your lender will be able to provide you specific guidance 
• As of 2022, the IRS allows parents to collectively gift a child up to $32,000 without paying tax on that money, and other family members can gift up to $16,000 without paying tax
• Gift recipients generally do not pay tax on down payment gifts, and there’s no actual limit on the dollar amount someone can be gifted to use toward the purchase of a home if the home will be the borrower’s primary residence 
• Many lenders require documentation of gift money, like a signed letter from the donor(s) and verification of transfer of funds. But if you can keep any gift money in your own bank account for a couple of months prior to applying for a mortgage loan, the bank may not require such detailed asset verification since those funds are considered “seasoned” 
• You cannot use gift funds from anyone who would profit from the home purchase, such as the real estate agent or builder 

The bottom line

The gift of money can help borrowers get over the down payment hurdle, taking weight off their shoulders and helping them get into homes sooner. If you know you’ll be receiving gift funds to put toward your down payment, be ready! Prepare to document the sources of those funds for your lender and comply with any related/applicable restrictions so your mortgage loan process is as smooth and seamless as possible.