Definition: Gift funds refer to money given to a homebuyer by a family member, close relative, or approved donor to assist with the down payment, closing costs, or other home purchase expenses. These funds are typically used to help buyers qualify for a mortgage by reducing the amount of money they need to bring to the transaction.
Explanation: Many loan programs, including FHA, VA, and conventional loans, allow buyers to use gifted money for all or part of their down payment. However, to prevent fraud or misrepresentation, lenders require a gift letter stating that the funds are a true gift and do not need to be repaid. Some programs have restrictions on who can provide gift funds—most commonly, immediate family members such as parents, grandparents, or siblings.
Lenders will often verify the source of the gift funds by requesting bank statements from both the donor and the recipient to ensure the money did not originate from a loan. If a lender suspects that the money is actually a loan disguised as a gift, it could jeopardize the buyer’s mortgage approval.
Example: A first-time homebuyer wants to purchase a $300,000 home with a 5% down payment ($15,000) but does not have enough savings. Their parents gift them $10,000, and they contribute the remaining $5,000 from their own funds. The buyer provides a signed gift letter from their parents to the lender, confirming that the money does not need to be repaid.