Homebuyers

Buying a Home with Gift Funds: Homeownership Made Possible with the Help of Family and Friends

When Illinois resident Melissa Whitney set out to buy a home for herself and her two young children, she ran into an all-too-common financial obstacle: She didn’t have enough of a down payment to buy what she needed.

Finding the right place to live and work was important to Whitney, 42, an employee in the accounting department of an international company. She has a hybrid job that allows her to work from home two days a week.

Whitney had taken everything out of her savings that she could spare. While she could have made up the difference with the larger mortgage she was approved for, it would have left her financially strapped.

So, Whitney, like many other millennial and Gen Z homebuyers, figured out a way to make homeownership possible. She received gift funds from her parents.

They gave her $13,000 to put toward the home she bought for $159,900 at the end of August. That help allowed her to take out a mortgage for only $141,000 on the three-bedroom, two-bathroom ranch home in the Quad Cities area.

“The extra money made my mortgage payments more manageable, even though I intend to pay my parents back,” said Whitney, a second-time homebuyer. “I estimate I’m saving $200 to $300 per month on the mortgage.”

More first-time homebuyers are using gift funds

As home prices—and mortgage rates—have risen sharply in recent years, many first-time and repeat buyers are struggling to afford homeownership.

Whitney isn’t alone in seeking help. As of April 2024, 12% of buyers received down payment funds from friends and family, according to the National Association of Realtors.

Many of these buyers are in areas like New York City and Los Angeles, where real estate prices are high.

That may at least partially be because the national median home list price jumped 35.6% from September 2019 to September 2024, according to Zillow data. Meanwhile, mortgage rates increased from an average of 3.75% in the week ending Oct. 24, 2019 to 6.54% in the week ending Oct. 24, 2024, according to Freddie Mac data.

How to buy a home with gift funds

Although borrowing money or receiving a financial gift makes homebuying more affordable, it does come with some strings attached.

Lenders take particular interest in the source of funds for down payments and often require extra documentation when there is borrowing or gifts involved. That is because they want to make sure that the applicant does, indeed, have enough income and financial assets to make the monthly mortgage payments without going into the red.

Sometimes that involves a gift letter that certifies this cash is a gift that does not need to be repaid. It typically also includes the amount, the address of the property that the recipient hopes to purchase, and the relationship between the giver and the recipient.

Buyers may want to request their family or friends give them the money in the form of a check so there is a paper trail.

Conventional mortgages typically allow gifts from family members and life partners, as long as the purchase is not an investment property.

Other types of loans may require additional proof of transfer of funds or validation of assets from the person supplying the down payment gift or loan.

In Whitney’s case, her lender New American Funding required her to submit a letter signed by her father that noted the dollar amount he was giving her. She also was asked to get a cashier’s check for that amount, photograph it, and send it to her loan officer.

“The process was all very smooth,” she said.

What to consider before using gift funds

Gifts can have tax consequences, which the giver and the recipient should consider.

Although money used to make down payments on homes isn’t taxed, the gift money, depending on the dollar amount, may be.

The IRS charges a gift tax to the giver. In 2024, the maximum tax-free amount that may be given to an individual annually is $18,000. For married couples, it’s double at $36,000.

In addition, those giving the money may need to provide proof of where the funds they gave came from.

Down payment assistance can also help homebuyers

Of course, there are other ways to get more money for your down payment.

It may be worth exploring down payment assistance programs, which offer loans, grants, or even tax credits to help buyers at the closing table. They are funded not only by banks and federal and state agencies, but also by local non-profit organizations, housing groups, and sometimes even employers.

Down payment loans and grants can provide a big boost for home buyers who want to buy a more expensive home. But they only make sense if the buyer has enough financial assets to pay off the loan or can afford to make the extra payments on higher-priced property.

Gift funds can help buyers afford homeownership

Whitney said that the $13,000 from her parents was the difference between buying the house and having to pass on the purchase.

The payments she’s making to her parents on the loan are less than what they would have been had she bundled the amount into her mortgage. And, what’s best of all, she’s not locked into a rigid repayment schedule.

“The advice I would give is to make a deal with the person you’re borrowing from to pay it back in a comfortable way,” she said. “Otherwise, you will overextend yourself, and the whole point is not to do that.”