How to Lower Cash to Close With Gift Funds on a Conventional Loan

The Quick Read: A gift from an eligible donor can pay part or all of your down payment, closing costs, and reserves, which cuts the cash you bring from your own account. Three things have to be true: the donor is acceptable, the gift is documented with a signed letter, and the money can be traced. On a one-unit primary home, the gift can often cover everything, subject to lender guidelines and full file review.

A gift does not change the price or the closing costs. It changes who pays them. This guide walks through how the math works, who can give, and where the rules tighten.

What Does “Cash to Close” Actually Include?

Cash to close is the money you must bring to the table on closing day. It is the down payment plus closing costs, prepaid items, and escrow deposits, minus any credits and your earnest money already paid.

Here is how a gift touches each piece:

• Down payment: a gift can fund all or part of it.
• Closing costs: a gift can pay these too.
• Prepaids and escrow deposits: taxes and insurance paid up front are covered.
• Reserves: cash gifts can count toward reserves. A gift of equity cannot.

People mix up two terms. “Closing costs” means upfront costs excluding the down payment. “Cash to close” is what you actually bring after credits and the loan. The second number is the one that matters, because a gift lowers what comes out of your savings.

How Much of Cash to Close Can a Gift Cover?

On a one-unit primary home, a gift can cover all of it. Fannie Mae’s Selling Guide on personal gifts says gifts may fund the down payment, closing costs, or reserves. Above 80% loan-to-value, a one-unit primary residence still needs no minimum from your own funds.

The rules tighten with the property type. LTV (loan-to-value) is your loan amount divided by the home’s value.

Across the wholesale programs we place files with, a first-time buyer on a one-unit primary home can reach 97% LTV, which means 3% down. Most other primary-residence buyers can reach 95%. A gift fills that small down payment and the closing costs, so many buyers bring little of their own cash. Two- to four-unit primary homes also reach 95% LTV, but that 5% own-funds minimum applies there. Second homes reach 90%, with the same own-funds rule above 80%. Every figure is subject to lender guidelines.

One more detail. The Fannie Mae page has a footnote on donors who have lived with you for a period of time, and how their gift can count as your own funds. Read the footnote on the guide page if that fits your household.

A Worked Example

Picture a first-time buyer purchasing a one-unit primary home at 97% LTV. The buyer needs three buckets of cash: the 3% down payment, closing costs, and prepaids plus escrow deposits. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.

Scenario one: no gift. The buyer pays all three buckets from savings. Earnest money already paid is credited at closing.

Scenario two: gift to closing costs only. A parent gifts enough for the closing costs and prepaids. The buyer pays only the 3% down payment, less earnest money already paid. The loan amount stays the same, so the monthly payment and mortgage insurance do not change. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.

Scenario three: gift to costs plus part of the down payment. Now the buyer brings less cash and puts more down. The loan amount falls a bit. A smaller loan can mean a lower payment and lower mortgage insurance. Mortgage insurance is required above 80% LTV, and published typical annual premiums run 0.58% to 1.86% of the balance. That is a range, never a quote. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.

Scenario four: stacking. Seller credits, where the seller pays part of your costs, are a separate lever from gifts. Both reduce cash to close, but each has its own limits and paperwork. Your loan officer will track which dollar came from which source.

Gift money does not lower the price or the lender’s costs. It moves who pays them.

Who Can Give You a Gift?

The donor must be an acceptable one. Under Fannie Mae, a relative means your spouse, child, or other dependent, or anyone related by blood, marriage, adoption, or legal guardianship.

Fannie Mae’s September 2022 update widened the pool to certain non-relatives with a familial relationship, such as a former relative, a relative of a domestic partner, or a godparent. A separate list covers a domestic partner or fiancé(e). The full list lives on the Fannie Mae page, so check it before you ask anyone.

Freddie Mac also expanded its donor list in Bulletin 2022-25, which covers both gift funds and gifts of equity. The two agencies are not identical, so your lender checks which one the loan is sold under.

Who cannot give: the builder, the developer, your real estate agent, or anyone else with a stake in the deal. A seller can give in one narrow case, covered below.

Which Rules Change on Your Particular Loan?

The general rule is simple. Edge cases are where files stall.

• Investment property: both agencies bar gifts. If the home is a rental, this article does not apply.
• Seller as donor: Fannie Mae’s September 2023 update lets a donor who is also the seller qualify if they have no tie to another interested party. Gifts from an estate or trust set up by an acceptable donor can also work.
• HomeReady and Home Possible: these programs have income limits of 80% of area median income. Their contribution rules are program-specific, so ask your loan officer to confirm them.
• Wedding and graduation gifts: Freddie Mac treats these as eligible sources on a primary residence, from related or unrelated givers, with proof of the event and a deposit timing requirement. Ask your lender for the current window.
• Agency grants: Freddie Mac allows these on owner-occupied homes only, not second homes.
• Gift of equity: this is a gift from the seller to the buyer, a portion of the seller’s equity credited in the deal. It can fund the down payment and closing costs, but never reserves. It needs a signed gift letter and a settlement statement listing it. A low appraisal changes the equity math, because the gift is the gap between value and price.

What Does the Paper Trail Look Like?

Every gift needs two things: a signed gift letter, and proof the money moved. A letter alone is not enough.

1. Choose the donor. Confirm they are acceptable and have no stake in the sale.

2. Confirm your structure. Check your LTV, unit count, and occupancy to see whether an own-funds minimum applies.

3. Get the signed gift letter. Fannie Mae requires one signed by the donor. A typical letter states the amount, the transfer date, the donor’s name, address, phone, and relationship, and says no repayment is expected. Check the current guide page for exact contents.

4. Verify donor funds and the transfer. The lender must confirm either that the donor’s account holds enough money, or that the funds already reached your account. Per the 2022 update, proof of an electronic transfer from the donor to you or to the closing agent is acceptable.

5. Pick the delivery path. Money can land in your account first, or go straight to the closing agent by wire or official check. Direct-to-closing often means fewer deposits to explain on your statements.

6. Check the Closing Disclosure. The CFPB’s Closing Disclosure guide tells you to compare Cash to Close with your latest Loan Estimate.

Wording to avoid: any language suggesting repayment. A loan dressed up as a gift is a misrepresentation, and it can amount to mortgage fraud.

When Should You Ask Your Donor?

Earlier than feels comfortable. A practical order looks like this:

• Before pre-approval: tell your loan officer a gift is possible, and who the donor is.
• At contract: confirm the donor’s amount and method.
• During processing: collect the signed letter and donor statements.
• Before the Closing Disclosure: make sure the transfer has landed or is documented.
• Closing day: funds delivered to the closing agent match the final number.

If the gift covers only part of your cash to close, your own remaining funds must be documented too. Your cash to close can shift between the Loan Estimate and closing, so ask your donor about a small cushion.

What Goes Wrong, and How to Fix It

Key Terms Defined

Cash to close: the amount you must bring at closing after the loan, credits, and earnest money.

Gift funds: money given by an acceptable donor with no expectation of repayment.

Gift of equity: a credit from the seller, representing part of their equity in the home.

LTV (loan-to-value): the loan amount divided by the home’s value.

Reserves: money left in the bank after closing, kept as a cushion.

Interested party: someone with a financial stake in the sale, like the seller or agent.

How Should You Decide Where to Apply the Gift?

This is a real trade-off. Applying the gift to closing costs preserves your savings and keeps the loan the same. Applying it to the down payment shrinks the loan and can trim mortgage insurance. Mortgage insurance may be requested for cancellation at 80% of original value and ends automatically at 78%, under federal law.

For some buyers, keeping their own savings as post-closing cushion beats a slightly bigger down payment. For others, a larger down payment is the better use. Whichever way you go, your lender can show both versions side by side.

Lendmire’s conventional loan programs are available through wholesale lenders in 16 states. Eligibility is subject to lender guidelines, and nothing here is a commitment to lend.

Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit. Donors may also have gift-tax questions, so point them to the IRS and their own tax professional.

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 Selling Guide Announcement SEL-2022-08

3. Freddie Mac Guide Bulletin 2022-25

4. Fannie Mae Selling Guide Announcement SEL-2023-08

5. CFPB Closing Disclosure explainer

6. IRS