Gift Letter for Mortgage: What It Is and How to Use One

If someone gives you money to help buy a home, your lender needs to know about it. Not because they want to complicate things, but because they must verify where your funds are coming from. A gift letter for a mortgage handles that documentation.

Specifically, the letter comes from the donor and confirms three things: the money exists, the donor gifted the funds to you, and you do not have to repay them. In particular, that last part is the most important. If the funds were actually a loan, your lender would need to count that monthly payment against your debt-to-income ratio, which could change what you qualify for or how much you can borrow.

To be clear, a gift letter is not a legal contract. Instead, it is a straightforward statement that protects both you and your lender by making the nature of the funds crystal clear.

Above all else, your lender’s job is to make sure you can afford the mortgage you are applying for. Naturally, part of that means knowing exactly where your down payment and closing cost funds are coming from. A gift letter gives them a clear, documented answer.

It also protects you. Without one, a large deposit in your account looks like a potential loan, and lenders must treat it that way until they can prove otherwise. Because of that, it could count as a debt, which affects your debt-to-income ratio and could reduce what you qualify for.

Beyond the numbers, gift letters help lenders confirm nobody is misusing the funds. Too often, undisclosed transfers of money are at the center of mortgage fraud cases, and lenders must catch them before a loan closes. A signed gift letter, combined with bank statements showing the transfer, creates a paper trail that satisfies both the lender and any investor or agency backing the loan.

The good news is a gift letter doesn’t need to be long, but it does need to be complete. Keep in mind that lenders are looking for specific information, and a letter missing even one item can hold up your file.

At minimum, the letter should include:

• Donor’s full name and contact information so the lender can verify who is giving the funds
• Borrower’s full name to tie the letter to the loan file
• Relationship between donor and borrower because some loan programs restrict who can give gift money
• Gift amount the donor states clearly in dollars
• Transfer date or expected date the funds will be available
• Property address for the home the borrower plans to purchase
• Statement that the donor expects no repayment and that the funds are not a loan
• Donor’s signature and sometimes the borrower’s, depending on lender requirements

When possible, use your lender’s own gift letter form instead of writing one from scratch. The form already meets the lender’s specific requirements.

Not surprisingly, the answer depends on your loan type. For the most part, programs start with family members and expand from there, but the definition of an acceptable donor varies more than most borrowers expect.

Generally, family is almost always on the approved list. Conventional and government-backed loan programs accept parents, grandparents, siblings, spouses, and domestic partners. Beyond that, extended family members like aunts, uncles, and cousins qualify on many programs as well.

However, friends are a gray area. Some loan programs allow gift funds from close friends, but others require a documented family relationship. Employers, labor unions, nonprofits, and certain government agencies can also qualify as sources under the right circumstances.

There is one category, however, that is almost always off limits: interested parties. Anyone who has a financial stake in the transaction, such as the seller, the listing agent, or the builder, cannot provide gift funds. Their contribution would not be truly free because the transaction would tie it to the sale going through, which is exactly the kind of arrangement lenders must flag.

It’s worth noting that gift fund rules are not universal. In fact, each loan program has its own guidelines around who can give, how you can use the money, and how much of your own funds you need to contribute.

Fannie Mae and Freddie Mac set the guidelines here, and they are more restrictive than government-backed programs. For primary residences and second homes, lenders allow gift funds, but draw the line at investment properties. Additionally, if you are putting less than 20 percent down, the lender may require some of your own funds depending on the specific program. No loan program accepts gifts from interested parties.

Of all the major loan types, this one gives borrowers the most flexibility with gift funds. In fact, the entire down payment can come from a gift, and buyers can use them to cover closing costs too. Acceptable donors include family members, close friends with a documented relationship, employers, labor unions, charitable organizations, and government agencies. As with all programs, expect the lender to ask for a gift letter and documentation showing the transfer.

To learn more about using gift funds with a FHA loan, visit the our FHA Gift Funds guide.

Because buyers do not need a down payment, they most commonly use gift funds for closing costs or to cover the funding fee. Acceptable donors follow similar guidelines to other programs, but lenders prohibit gifts from interested parties. As a result, buyers do not need to contribute a minimum amount, which makes this one of the most flexible options for buyers who need outside help.

This program does not require a down payment either, so buyers typically use gift funds for closing costs and prepaid expenses. Much like VA loans, the rules around acceptable donors and interested party restrictions apply here too. That said, your lender will expect a signed gift letter and proof of transfer, consistent with other government-backed programs.

To learn more about using gift funds with a USDA loan, visit the our USDA Gift Funds guide.

Another factor worth understanding is what you are buying, since that affects how buyers can use gift funds. Simply put, lenders treat a primary residence, a vacation home, and a rental property very differently.

Among all property types, primary residences offer the most flexibility with gift funds. Most loan programs allow them to cover the down payment, closing costs, or a combination of both. The restrictions are minimal compared to other property types, which is why most gift fund conversations center on buyers purchasing the home they plan to live in.

Second homes, however, come with more conditions. Conventional loans permit gift funds for second home purchases, but depending on the down payment amount, lenders may ask the borrower to contribute some of the money directly. Government-backed programs like FHA, VA, and USDA generally serve buyers purchasing primary residences, so second home scenarios are largely a conventional loan conversation.

Of all property types, Investment properties carry the most restrictions. Conventional guidelines do not allow gift funds for investment purchases, and there is no government-backed workaround. For that reason, lenders expect buyers financing a rental or investment property to use their own funds.

Fortunately, receiving gift money toward a home purchase involves a few moving parts, but none of them are complicated if you handle them in the right order. As an example, Ava’s experience shows how the process looks when she and her lender handle everything correctly.

At the time, Ava was buying her first home and her grandmother offered to help with the down payment. Before the money moved anywhere, Ava brought it up with her loan officer. In the end, that one conversation shaped how the rest of the process went.

Her loan officer explained the documents and steps she needed to complete. The first step was the gift letter. Because the lender had their own form, her grandmother just had to fill it out and sign it rather than write something from scratch. For that reason, Ava made sure that happened before the wire transfer so the documentation matched the timeline.

Next came the bank records. Her grandmother kept a copy of the wire confirmation, and Ava saved the deposit statement showing the funds hitting her account. So when underwriting requested both, they were ready the same day. No back and forth, no delays while the team pulled the necessary records.

At the same time, Ava’s loan officer checked the program requirements and confirmed the funds had been in her account long enough. If the timing had been tighter, however, they would have needed a letter of explanation and possibly additional statements.

At closing, the lender applied the gift funds to the down payment and closing costs according to the original documentation. As a result, Ava closed on schedule, and her grandmother’s contribution made it possible without creating a single hiccup in underwriting.

Generally speaking, receiving gift funds for a home purchase does not create a tax burden for the buyer. Under IRS rules, gifts do not count as taxable income for the recipient, so the borrower has nothing to report.

That said, the donor’s side of the equation is where tax rules can come into play. The IRS sets an annual gift tax exclusion, which is $19,000 per individual in 2025 and 2026. As long as the gift stays under that threshold, the donor does not need to report anything. Should a gift exceed that amount, the donor may need to file a gift tax return, though filing a return is not the same as owing taxes. Typically, donors will not owe anything because the excess simply reduces their lifetime exemption.

Still, large gifts are where things get worth a second look. If the amount is significant, the donor should consult a tax professional before transferring the funds. As with most tax matters, the right guidance upfront is a lot easier than sorting things out after the fact.

Although cash toward the down payment is the most common form of help, it is far from the only option. For some buyers, one of these alternatives might actually be a better fit.

• Co-sign the mortgage. By co-signing, someone with strong credit and income can strengthen the application without transferring any ownership. The trade-off is that the co-signer takes on financial liability if the borrower misses payments.
• Become a co-borrower. Unlike a co-signer, a co-borrower is on the title as well as the loan. This means they share both the mortgage obligation and ownership of the property, which is a bigger commitment but can open doors for buyers who cannot qualify on their own.
• Gift money toward closing costs instead. When the buyer already has enough money for the down payment but needs help with closing costs, that is a legitimate use of gift funds on most loan programs.
• Down payment assistance programs. For buyers without a family member in a position to help, options still exist. Many state and local programs offer grants or forgivable second loans that help buyers cover the down payment. While first-time buyers are often the primary target, eligibility rules vary, so research what your area offers.

No matter the loan type, documenting gift funds correctly starts with involving the right loan officer. Here at DSLD Mortgage, we work with buyers at every stage of the process, from pre-approval through closing, and make sure everything in your file holds up before it ever reaches underwriting. So if you have questions about gift letters, down payment requirements, or what loan program fits your situation, we would love to help. Check out our current offers at dsldmortgage.com and reach out when you are ready to get started.