One of the biggest challenges today’s buyers face is saving enough money for their down payment and closing costs. Options like mortgage insurance offer strategies to lower the down payment amount, and gift funds may be another option for borrowers who aren’t able to document sufficient funds for closing. However, it’s imperative to understand the nuances of gift fund requirements because, when it comes to conventional loans, Fannie Mae and Freddie Mac have specific requirements that need to be considered. 

Let’s break it down by discussing what constitutes a gift, what this money can be used for, who can contribute a gift and what is involved in documenting gift funds.

What is a gift? 

A gift is money given to a borrower by a family member or other eligible donor to help with their down payment or closing costs. These funds are not a loan that must be repaid.

Gift funds fall into 3 main categories:

• Personal gifts 
• Gifts of equity, which are given by the seller of a property to the buyer. The source of the gift is a portion of the seller’s equity in the property. These funds will be transferred to the buyer as a credit on the closing disclosure 
• Grants, which are non-repayable funds that assist buyers with home purchases. The source of these funds is from established programs that target specific groups, such as first-time buyers or individuals with moderate-to-low incomes 

Who is an eligible donor? 

Both Fannie Mae and Freddie Mac include the following as eligible donors: 

• Any individual who is related to the borrower by blood, marriage, adoption, or legal guardianship  
• A non-relative that shares a familial relationship with the borrower, such as a domestic partner or a fiancé
• Trusts established by an eligible donor 
• Estate of a related person

Fannie Mae also allows:

• A relative of a domestic partner, a godparent or a former relative 

Freddie Mac also allows: 

• An individual with family-like ties
• Unrelated individuals in the case of weddings and graduations 

Keep in mind that a donor may not be – or have any affiliation with – the builder, the developer, the real estate agent, or any other interested party to the transaction. Sellers may provide gift funds as long as they are not affiliated with any other interested party to the transaction.   

Gift funds from a related real estate agent’s commission can be used for closing costs and prepaids provided the amount is within the interested party contribution limits, but cannot be used for the down payment or reserves.

Are there any limitations on gifts?

Gift funds are allowed for mortgage loans secured by a principal residence or a second home but are not allowed in an investment property transaction.

Transactions involving a 1-unit principal residence do not require a minimum borrower contribution, meaning that all funds needed to complete the transaction can come from a gift. If the property type is a 2- to 4-unit property or a second home, a minimum borrower contribution from the borrower’s own funds may be required. Refer to the program guidelines for specific requirements.

There are some instances where gift funds from an acceptable donor can be pooled with the borrower’s funds to make up the required minimum cash down payment. An example would be a domestic partner or fiancé who has resided with the borrower for the past 12 months and who will continue to do so in the new residence. For these types of situations, a certification from the donor is required along with documentation verifying a shared residency, such as a copy of a driver’s license, a bill, or a bank statement confirming the same address as the borrower.

What are the documentation requirements for gifts?

Gift funds are documented by a gift letter, which must:

• Specify the actual or the maximum dollar amount of the gift
• Include a statement that no repayment is expected
• Indicate the donor’s name, address, telephone number and relationship to the borrower

No form of verification of relationship (DNA test or equivalent) is required, as this would fall under borrower representation.

How are the donor’s availability of funds verified?

The lender must verify that sufficient funds to provide the gift are either in the donor’s account (or trust or estate account owned by the donor) or have been transferred to the borrower’s account. Acceptable documentation includes any of the following:

• A copy of the donor’s check and the borrower’s deposit slip
• A copy of the donor’s withdrawal slip and the borrower’s deposit slip
• Evidence of the electronic transfer of funds from the donor’s account to the borrower’s account or the closing agent
• A copy of the donor’s check to the closing agent
• A settlement statement showing receipt of the donor’s check

When the funds are not transferred prior to closing, the lender must document that the donor gave the closing agent the funds in the form of an electronic transfer, certified check, cashier’s check, or other official check.

Yes, structuring loans using gift funds may be more work for you. However, doing so may allow you to help more buyers, which will increase your business. When borrowers sense that you have explored all possible financial options on their behalf, they are more likely to see you as a trusted advisor and will show their gratitude by referring others to you.

Looking to explain gifts to a borrower? Share this Readynest story with potential homebuyers who are considering using gift funds.