Gift-Funded Down Payment Rules on a Conventional Loan

The Quick Read: On a conventional loan, a gift from an acceptable donor can usually fund part or all of the down payment on a home you will live in. Acceptable donors are relatives and people with a close familial tie, and the donor cannot have a stake in the sale. The lender needs a signed gift letter and a documented transfer. Second homes, and some multi-unit purchases at higher leverage, can require some of your own money. Gifts are not allowed on investment property.

How Much of the Down Payment Can a Gift Cover?

On a one-unit principal residence, a gift can fund all or part of the down payment. That matters because the conventional lane here is built around low down payments. Across the wholesale programs Lendmire places files with, a one-unit primary home with a fixed rate allows 97% LTV (3% down) when at least one borrower is a first-time buyer, meaning no ownership interest in a residence in the previous three years. Otherwise the standard purchase tops out at 95% LTV (5% down). Two- to four-unit principal residences also reach 95%. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.

Here’s where the general rule bends. Fannie Mae’s Selling Guide on personal gifts says gifts may fund the down payment, closing costs, or reserves “subject to the minimum borrower contribution requirements.” In plain terms, some property types at higher leverage ask you to put in some of your own funds first. Second homes and multi-unit homes are where that shows up. The exact threshold is a guideline detail, so confirm it with your loan officer on your specific file.

Second homes reach 90% LTV under the program, compared with 95% on a primary residence. Investment property is capped lower and cannot use gifts at all. Occupancy decides the leverage, and it decides whether a gift is on the table. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.

Who Counts as an Acceptable Donor?

A relative, or someone with a close familial relationship, is the baseline. The Selling Guide defines a relative as a spouse, child, or other dependent, or anyone related by blood, marriage, adoption, or legal guardianship. It also covers non-relatives who share a familial relationship, such as a domestic partner, a person engaged to marry the borrower, a former relative, or a godparent.

That list is narrower than most buyers expect. A friend, an employer, or a charity generally does not qualify as a personal gift donor on a conventional loan. Those sources may fit other structures, like assistance programs or lender contributions, but they are not gifts in this sense.

The other test is affiliation. The donor cannot be, or be tied to, the builder, developer, real estate agent, or any other interested party in the transaction. A seller can be a donor only when the seller is an acceptable donor and has no affiliation with another interested party. Fannie Mae’s Announcement SEL-2023-08 made that seller point explicit. It also allowed gift funds to come from the estate of an acceptable donor, or from a trust the donor established.

Freddie Mac frames the donor list through “Related Persons,” and it includes certain trusts, estates, and businesses owned by a Related Person. Freddie Mac’s Guide treats gift funds as an eligible source within its asset framework. The two agencies are close but not word-for-word identical, so a borderline relationship is worth raising early.

How Is a Gift-Funded Purchase Underwritten, Step by Step?

The sequence matters more than any single rule. A file with a clean order of events rarely hits trouble.

1. Tell your loan officer first. Do this before the money moves. A deposit that shows up unannounced and undocumented may be impossible to use.

2. Check the donor. Confirm the relationship fits the acceptable list and has no tie to the sale.

3. Confirm the structure. The lender checks occupancy, unit count, and LTV. Those set whether you must contribute any of your own funds.

4. Sign the gift letter. It states the dollar amount, the transfer date, that no repayment is expected, and the donor’s name, address, phone, and relationship to you. The lender’s template governs, and notarization is not typically required.

5. Document the transfer. Acceptable evidence includes an electronic transfer from the donor’s account to yours or to the closing agent. A donor check with your deposit slip also works, as does a settlement statement showing the donor’s check was received.

6. Run it through automated underwriting. The gift is entered as a source of funds, and the findings drive what documents the lender asks for.

7. Close. Funds go to the closing agent or into your verified account.

A gift is not income and not debt, so it does not enter your debt-to-income calculation. Your own credit and income still have to qualify. The wholesale conventional programs start at a 620 decision score, and the automated finding governs most files, with a total ratio ceiling of 50%. A gift fills the cash gap. It does not substitute for qualifying.

One practitioner pattern worth knowing: the files that stall are rarely about donor eligibility. They are about timing. A gift lands in the borrower’s account weeks before anyone told the loan officer, the amount doesn’t match the letter, and the lender has to trace it backward. Some lenders also like to see gifted funds sit for a period before closing. That is a lender preference, not an agency rule, so ask early.

What Is a Gift of Equity?

A gift of equity is a gift from the seller to the buyer, passed along as a credit in the transaction. It usually happens when a relative sells you a home below its appraised value. Fannie Mae’s guidance on gifts of equity allows it on principal residence and second home purchases, and it can cover all or part of the down payment and closing costs.

Three details separate it from a cash gift:

• It is a credit, not cash. It appears on the settlement statement and the Closing Disclosure.
• It cannot be used for reserves. A cash gift can, subject to the contribution rules. Equity credit cannot.
• The appraisal still has to support the value. There is no special “gift appraisal.” The difference between the appraised value and the reduced price is the equity credit.

Because a seller who is an acceptable donor is not treated as an interested party, the gift of equity is not subject to the usual limits on seller contributions. A signed gift letter and a settlement statement listing the gift are required.

Where the General Rule Breaks

Most gift questions resolve in the main lane above. These are the edges that catch people.

• Investment property. Neither Fannie Mae nor Freddie Mac allows gift funds on an investment property. If the home is not going to be your residence or second home, a gift is not an option on the conventional program.
• Gifts as disguised loans. If the money is expected back, it is a loan, not a gift. A loan is a liability and would count in your ratios. Presenting a loan as a gift is a misrepresentation to the lender, and it can create serious legal exposure. The letter exists to attest that no repayment is expected.
• Seller or builder as donor. A builder, developer, or agent cannot gift you money, even if they are family friends. A related seller can, under the conditions above.
• Wedding gifts. These can be treated differently from ordinary gifts, sometimes under large-deposit rules instead. Ask your loan officer how your file will treat them.
• Donor lives with you. The guidelines include a provision for a donor who has lived with the borrower for a stretch of time, where the gift can be treated more like the borrower’s own funds for contribution purposes. Ask whether it applies.
• Friends, employers, charities. Not personal gift donors on a conventional loan. Other programs may accept them, and other loan types such as FHA have different donor lists.
• Lender overlays. An individual lender can ask for more than the agency minimum, including extra documentation or a longer seasoning period on gifted funds.

What Should You Gather Before You Make an Offer?

A short list saves the most friction:

• The donor’s name, address, phone number, and exact relationship to you.
• A decision on how the money will move: electronic transfer, check, or direct to the closing agent.
• The amount, so the letter, the transfer, and any deposit all match to the dollar.
• Statements for your own accounts, in case your loan officer needs to show your funds alongside the gift.
• A conversation between the donor and a tax professional, if the gift is large.

On that last point: tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit. For gifts, the IRS gift tax FAQ notes the donor is generally the one responsible, so that conversation belongs with the donor, not the buyer.

One more precaution. Closing funds are a target for fraud. If a wire instruction arrives by email and looks slightly off, call the closing agent on a number you already trust before sending anything. The CFPB’s page on common scams notes that scammers go after down payment and closing funds.

Does a Bigger Gift Change Your Mortgage Insurance?

It can. Mortgage insurance is required above 80% LTV. A larger down payment, gift-funded or not, lowers the loan balance relative to the price, and it can reduce or remove the insurance. Published typical annual premiums run from 0.58% to 1.86% of the balance, which is a range and not a quote. The premium depends on your score, your leverage, and the file. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.

Insurance also isn’t permanent on a conventional loan. You can request cancellation when the balance reaches 80% of the original value, with a good payment history, no subordinate liens, and no decline in value. The servicer must terminate it automatically at 78% under the Homeowners Protection Act. A gift that cuts the starting loan size moves you closer to those thresholds on day one.

Key Terms Defined

Acceptable donor: A person with a qualifying relationship to the borrower and no tie to the sale.

Gift letter: A signed statement giving the amount, the donor details, and a promise that no repayment is expected.

Gift of equity: A credit from the seller to the buyer that reflects part of the seller’s equity in the home.

Interested party: The builder, developer, agent, or other person with a stake in the transaction.

Minimum borrower contribution: The portion of funds some loans require from your own money before a gift can fill the rest.

Reserves: Funds left after closing that show the lender you can keep paying the mortgage.

Next Steps

If you are buying a home and want to see whether a conventional loan fits your file, Lendmire can help you compare the options and what each one asks of the file. The mortgage broker arranges loans through wholesale lenders, and program details are subject to lender guidelines and full file review. This is not a commitment to lend. You can look at conventional loan programs first, or read Lendmire’s piece How Jumbo Loan Gift Fund Rules Work for a Down Payment if your loan amount may exceed conforming limits.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. Fannie Mae Selling Guide B3-4.3-04, Personal Gifts

2. Fannie Mae Announcement SEL-2023-08

3. Freddie Mac Guide, Section 5501.8

4. Fannie Mae Selling Guide B3-4.3-05, Gifts of Equity

5. IRS, Frequently Asked Questions on Gift Taxes

6. CFPB’s page on common scams