Financing a Home Purchase With Gift Funds: Rules, Letters and Lender Requirements

Written by Samantha SheltonNMLS 1647301Updated October 2026

Gift funds are money given to a home buyer, usually by a family member, to cover the down payment, closing costs or reserves, with no expectation of repayment. Every major loan program expects a signed gift letter naming the amount, the donor and their relationship to you, and on a purchase your lender documents the transfer with the most recent two full months of account activity.

The rules are more generous than most buyers assume: Fannie Mae requires no minimum contribution from your own funds on a one-unit primary residence, and FHA allows the full 3.5% minimum required investment to be gifted. Gifts work on primary residences and second homes, never investment properties.

Learn how to finance a home purchase with gift funds, including who can donate under each loan program, what a gift letter has to say, and the paper trail underwriting expects. Newer to this? Start with our Home Buying guide.

Key takeaways:

• The gift letter is mandatory: Lenders require a signed letter carrying 5 elements. The dollar amount, the donor’s contact information, their relationship to you, the property address, and a statement that no repayment is expected.
• Eligible donors differ across the 4 main programs: Conventional loans accept relatives plus domestic partners, fiancés and long-standing familial-like relationships; FHA also allows employers, labor unions, close friends and charities. No program allows a gift from anyone with an interest in the sale.
• The paper trail matters as much as the letter: Purchase files are documented with the most recent two months of account activity, and any single deposit larger than 50% of your monthly qualifying income has to be sourced.

What are gift funds, and what can they pay for?

Gift funds are cash or equity transferred to a buyer with no expectation of repayment, and they can cover your entire down payment on most primary-residence loans. The defining test isn’t the amount or the donor, it’s the absence of repayment. If any condition is expected or implied, it isn’t a gift, and underwriting treats the money as a debt that changes your qualifying numbers. The money is broadly usable:

• Down payment: The most common use. Conventional, FHA, VA and USDA loans all permit gifted down payment funds, subject to each program’s minimum contribution.
• Closing costs and prepaids: Freddie Mac puts typical closing costs at 2% – 5% of the purchase price, so a $300,000 purchase can carry $6,000 – $15,000 in settlement charges. Our guide to closing costs breaks those down.
• Financial reserves: Conventional loans let gift funds count toward required reserves. VA and USDA do not.
• Earnest money: A gift can fund your offer deposit, but the money has to be in your account and documented first. See earnest money deposits.

A gift also isn’t an either/or against saving, most files combine a family gift, the buyer’s savings and a seller credit. Our guide to how to save for a down payment shows how to size the goal first.

Gift fund rules by loan type

Every program allows gifts, but they disagree about who may donate and how much has to be yours. None of them allow a gift on an investment property.

Conventional loans give the widest donor list

Fannie Mae’s donor definition now reaches past the old “blood, marriage or adoption” shorthand, adding a domestic partner and their relatives, a fiancé(e), a former relative, and a long-standing familial-like or mentorship relationship. It excludes anyone affiliated with the builder, developer or agent.

The minimum borrower contribution is where conventional rules surprise people. On a one-unit primary residence there is no minimum from your own funds at any loan-to-value ratio. The whole down payment can be a gift, including on a 97% LTV loan with 3% down. Second homes and 2 – 4 unit properties above 80% LTV require 5% of your own money. See low-down-payment mortgages for the 3% option and buying a second home for the 5% rule. One exception: if your donor has lived with you 12 months and both of you will occupy the home, the gift counts as your own funds.

FHA accepts donors no other program does

FHA’s list is the most flexible: a family member, your employer or labor union, a close friend with a clearly defined and documented interest in you, a charitable organization, or a government agency running a homeownership assistance program.¹ That “close friend” category has no conventional equivalent, and the full 3.5% minimum required investment can be gifted. On a $320,000 home, $11,200 that never has to leave your account.²

What FHA won’t accept is a gift from anyone with an interest in the sale, seller, agent, broker or builder. Money from those parties is an inducement to purchase, and the sales price gets reduced by that amount. Review the FHA loan guidelines from HUD, then compare programs in buying a home with a low down payment.

VA and USDA rarely need a gift at all

Both programs are built for zero down. VA-backed purchase loans require no down payment in most cases when you have full entitlement and the price doesn’t exceed appraised value, and USDA’s Section 502 Guaranteed program is 100% financing in eligible rural areas.³ Gifts here usually go toward closing costs. Both also draw the same line on reserves: VA requires them to be your own money, and USDA excludes gifts from the reserves calculation.

What goes in a gift letter?

A gift letter is a short signed statement from the donor confirming the money is a gift and not a loan, and Fannie Mae requires it to carry five specific pieces of information:

• Exact dollar amount: The actual amount or the maximum. Vague language such as “approximately $15,000” gets the letter sent back.
• Donor’s full contact information: Name, address and telephone number. Underwriters do occasionally call.
• Relationship to the buyer: Name it specifically. The relationship is what makes the donor acceptable under the program’s rules.
• Property address: Ties the gift to this transaction instead of leaving it open-ended.
• Explicit no-repayment statement: The single most important sentence in the document.

Most lenders want both parties to sign. Here’s the shape of a compliant letter, replace the bracketed fields first.

Sample gift letter

I, [Donor full name], am gifting $[amount] to [Buyer full name], my [relationship], for the purchase of the property at [property address]. These funds are a bona fide gift. No repayment is expected or implied, and no portion came from anyone with an interest in the sale. The funds were withdrawn from my account at [institution], ending in [last four digits].

[Donor name, address, phone], [Donor signature and date]
[Buyer signature and date]

Your lender will usually supply its own template, and using theirs is faster. For an independent walkthrough, this legal guide to using gift funds for a home purchase covers the language from the donor’s side.

How do lenders verify gift funds?

The letter is only half the file. Lenders also have to prove the donor had the money and that it moved, and on a purchase, bank statements must cover the most recent full two-month period of account activity, or 60 days.

Fannie Mae accepts several forms of transfer evidence, and any one will do: the donor’s check or withdrawal slip paired with your deposit slip, records of an electronic transfer to your account or the closing agent, or the donor’s check to the closing agent. When the money moves after settlement, the lender must document that the donor gave the closing agent an electronic transfer, certified check or cashier’s check.

Three complications account for most gift-fund delays:

• Large deposits: A single deposit exceeding 50% of your total monthly qualifying income must be sourced. If it can’t be documented, the lender reduces your verified funds by the unsourced portion, shrinking your down payment right before closing.
• Cash that can’t be traced: HUD requires the donor’s withdrawal record plus your deposit record, and cash handed over in person produces no trail.
• Multiple donors or late arrivals: Every donor needs their own letter and transfer documentation, and a gift landing mid-underwriting restarts the asset review.

Deposit the gift into one account, in one transaction, in the exact amount the letter states. Our explainer on mortgage underwriting covers how asset conditions get cleared, and the home closing process guide shows where the funds must be by settlement day. The CFPB’s home buying preparation tools track what lenders request, and our preparing to buy hub sequences it.

Do you owe taxes on gift money for a house?

No. As the recipient you owe no income tax on gifted funds and don’t report them.⁴ The reporting obligation belongs to the donor.

Two IRS numbers govern the donor’s side. For 2026, the annual gift tax exclusion is $19,000 per recipient, so a donor can give any one person that much without filing a gift tax return. Above it the donor files Form 709, but filing rarely means paying: the excess counts against the donor’s lifetime basic exclusion amount, $15 million for 2026. A married couple can each give $19,000 to the same person, which is how parents commonly move $38,000 to one child, or $76,000 to a married couple, with no return at all. Donors moving large sums should confirm reporting with a tax professional.

What to do when a gift isn’t an option

Not every buyer has a donor. Three alternatives behave differently from gift money: none needs a letter, and all carry hard federal limits.

• A 401(k) loan: The IRS caps participant loans at the lesser of $50,000 or 50% of your vested account balance. Loans are generally repaid within five years, though plans may extend that when the money buys a primary residence. See financing a home purchase with a 401(k) for how the payment hits your debt-to-income ratio.
• An IRA withdrawal: First-time buyers can take up to $10,000 from an IRA without the 10% additional tax on early distributions. That $10,000 is a lifetime limit across all qualified first-time-homebuyer distributions, and ordinary income tax may still apply.
• Down payment assistance: Grants and second-mortgage programs work like institutional gifts, and FHA explicitly accepts funds from a government homeownership assistance program. Start with first-time home buyer programs.

A co-signer isn’t a gift at all. It changes who is legally obligated on the loan rather than where the cash comes from. Read co-signing a mortgage: risks and benefits before you ask.

What Michigan buyers should know

Michigan buyers can stack a family gift on top of state assistance, and the combination often covers the entire cash to close. The Michigan State Housing Development Authority (MSHDA) runs the MI 10K DPA Loan: up to $10,000 toward down payment, closing costs and prepaids, structured as a 0% interest, non-amortizing second mortgage with no monthly payment, repaid when you sell, refinance, pay off the first mortgage or stop living in the home.

• Pair it with the right first mortgage: The MI 10K DPA Loan must be combined with a MI Home Loan, which carries a 640 minimum credit score and homebuyer education.

Because Align is a broker, we place MSHDA loans alongside conventional, FHA, VA and USDA financing and can show you which combination nets you more. See first-time home buyer grants and programs for what else is available, and buying a home with a low income for the income-based options.

FAQ: Gift funds for a home purchase

Here are answers to common questions about gift funds for a home purchase.

Who can gift money for a house down payment?

For conventional loans, acceptable donors are relatives by blood, marriage, adoption or legal guardianship, plus domestic partners, fiancés, former relatives and people with a long-standing familial-like or mentorship relationship with you. FHA extends eligibility to close friends with a documented interest in the borrower, employers, labor unions and charities. The universal rule: the donor cannot be anyone with a stake in the sale. If several relatives want to help, see co-buying a home with family or friends.

What has to be in a mortgage gift letter?

A gift letter must state the exact amount, the donor’s name, address, telephone number and relationship to the buyer, the property address, and an explicit statement that the funds require no repayment. Both parties sign it, and lenders also ask for proof the donor had the funds plus evidence of the transfer. Our explainer on mortgage underwriting shows where that lands.

Do I have to pay taxes on gift money for a house?

No. Recipients owe no income tax on gifted funds and don’t report them. Donors can give up to $19,000 per recipient in 2026 without filing a gift tax return, and amounts above that count against the donor’s lifetime basic exclusion amount of $15 million, so actual gift tax is rare. Donors giving large sums should confirm reporting with a tax professional. For the rest of the tax picture, see first-time home buyer tax credits.

Can my entire down payment be a gift?

Often, yes. FHA allows the full 3.5% minimum required investment to come from gift funds, and Fannie Mae requires no minimum borrower contribution on a one-unit primary residence at any LTV, so a 100% gifted down payment is permitted. Second homes and 2 – 4 unit properties above 80% LTV are the exception, requiring 5% from your own funds. If this is your first purchase, see purchasing your first house.

The bottom line on gift funds

Gift funds are money given to a buyer with no expectation of repayment, and they can cover your entire down payment on most primary-residence loans. Fannie Mae requires no minimum borrower contribution on a one-unit primary residence at any LTV, and FHA allows the full 3.5% minimum required investment to be gifted, the 5% own-funds rule shows up only on second homes and 2 – 4 unit properties above 80% LTV. Documentation is what makes or breaks the file: a signed gift letter, two full months of account activity, and proof the money moved from the donor’s account to yours.

If you’re ready to buy with help from family, talk to Align Lending, we’ll walk your donor through the letter and the paper trail, shop your scenario across our lender network, and show you the numbers side by side. Call 248-506-5727 or start online today.

Footnotes:

1. Align Lending is not acting on behalf of or at the direction of FHA or HUD. FHA donor eligibility and documentation requirements are set by HUD and are subject to change. Return to text.

2. Example figures are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. Your down payment, closing costs, and cash to close depend on your application, the property, and market conditions. Return to text.

3. Align Lending works with VA-approved lenders and is not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency. VA entitlement, down payment, and reserve requirements are set by the Department of Veterans Affairs and are subject to change. Return to text.

4. This article is not tax advice. Gift tax exclusion amounts, lifetime exclusion amounts, and reporting requirements are set by the IRS and change over time. Consult a qualified tax professional about your situation before making or receiving a large gift. Return to text.

Sources: acceptable donor definition, eligible occupancy types, minimum borrower contribution requirements, gift letter contents, transfer documentation, and the 12-month cohabitation exception, Fannie Mae Selling Guide B3-4.3-04 (02/04/2026). Two-month bank statement requirement on purchase transactions, Fannie Mae Selling Guide B3-4.2-01. Large deposit definition and treatment, Fannie Mae Selling Guide B3-4.2-02. FHA acceptable gift sources, the 3.5% minimum required investment, inducement-to-purchase treatment of interested-party gifts, and donor withdrawal and deposit documentation, U.S. Department of Housing and Urban Development, Single Family Housing Policy Handbook 4000.1 and HUD Homeownership Center reference guidance. VA no-down-payment eligibility with full entitlement and the requirement that reserve funds be the borrower’s own funds, U.S. Department of Veterans Affairs (VA.gov and VA Lenders Handbook, Pamphlet 26-7, Chapter 4). USDA Section 502 Guaranteed 100% financing and the exclusion of gift funds from the cash-reserves calculation, USDA Rural Development HB-1-3555. Closing costs of 2% – 5% of the purchase price, Freddie Mac (My Home by Freddie Mac). The 2026 annual gift tax exclusion of $19,000, the 2026 basic exclusion amount of $15,000,000, and the treatment of gifts as non-taxable to the recipient, Internal Revenue Service. Participant loan limit of the lesser of $50,000 or 50% of the vested balance and the $10,000 lifetime IRA first-time-homebuyer exception, Internal Revenue Service. MI 10K DPA Loan amount, 0% non-amortizing terms, 640 minimum credit score and homebuyer education requirement, Michigan State Housing Development Authority.

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Gift letters, gift tax reporting, and down payment assistance program terms should be reviewed with a qualified tax professional, attorney, or licensed loan originator before you act. Consult a qualified professional about your situation. Program terms and figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.

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