Many first-time buyers get help from family with the down payment or closing costs. Most loan programs allow gift funds, but lenders need to confirm that the money really is a gift and not a loan that will add to your monthly debts. Handling the gift correctly from the start avoids delays late in the process.
Who can give a gift
Each loan program sets its own rules about acceptable donors. Close relatives are commonly accepted, and some programs also allow gifts from a fiance or domestic partner, an employer, a close friend with a documented relationship, or certain charitable or government programs. A seller, real estate agent or builder generally cannot give you gift funds because they have an interest in the sale. Ask your lender which donors are allowed for your specific loan.
What a gift letter includes
Lenders usually ask the donor to sign a gift letter. Many lenders provide their own form. It typically includes:
- The donor's name, address, phone number and relationship to you
- The amount of the gift and the date it was or will be given
- A statement that no repayment is expected or required
- The address of the property you are buying, if known
- The donor's signature and, sometimes, yours
Building the paper trail
A gift letter is only half of the documentation. Lenders also verify that the money moved from the donor to you or to the closing. Common methods include:
- Donor statement and your statement: a bank statement showing the funds leaving the donor's account and your statement showing the deposit.
- Wire or cashier's check to the title company: the donor sends the gift directly to closing, with a copy of the wire confirmation or check.
- Clear transfers: electronic transfers that show the donor's name are easier to verify than cash deposits.
Cash handed over in person is very hard to document. Large unexplained deposits may need to be removed from the funds the lender can count.
Timing the gift
Talk to your lender before the money moves. Some lenders prefer the gift to be deposited early so it appears on your statements, while others prefer it go straight to the title company at closing. Either can work if it is documented correctly. If the gift is deposited after your application, expect to provide updated statements.
Program rules to ask about
- Whether you must contribute some of your own funds in addition to the gift
- Whether gift funds can be used for closing costs and reserves as well as the down payment
- Whether the donor must show the ability to give the funds
- Any limits on gifts of equity when buying from a relative
Tax points for the donor
For federal tax purposes, the person who gives a gift is responsible for any gift tax reporting, not the recipient. Gifts above the annual exclusion amount may require the donor to file a gift tax return, although that does not necessarily mean any tax is owed. The donor should check current IRS rules or ask a tax professional. Texas has no state gift tax.
Key takeaways
- Most loan programs allow gift funds from approved donors, but rules vary.
- Expect a signed gift letter and records showing the money moving from donor to buyer or closing.
- Plan the timing of the transfer with your lender before it happens.
- The donor handles any federal gift tax reporting.