Conventional Loans for Buyers Using Gift Money: Who Can Give It

The Quick Read: Gift money is allowed on a conventional loan for a principal residence or second home, but only from an acceptable donor. That generally means a relative or someone with a close, family-like tie, and never anyone with a stake in the sale, such as the builder, developer or real estate agent. The gift can cover the down payment, closing costs or reserves, and the lender will want a signed letter plus proof the money actually moved. Gifts are not allowed on an investment property.

Most gift-money files that stall don’t stall over the amount. They stall over the donor. A buyer finds out late that the person offering help doesn’t fit the agency definition, and the money has to be re-sourced. This article walks through who can give, what the gift can pay for, when the buyer still needs some of their own cash, and how the paperwork works.

Lendmire’s conventional loan programs page covers the loan side. This piece covers the gift side, as a mortgage broker would explain it to a buyer.

Who Can Actually Give You Gift Money?

The donor must be a relative or have a close, family-like relationship with you, and must have no tie to anyone on the deal. That is the whole test, and both halves matter.

The Fannie Mae Selling Guide on personal gifts defines acceptable donors in two groups. The first is relatives: your spouse, child or other dependent, or anyone related by blood, marriage, adoption or legal guardianship. The second is non-relatives with a familial relationship: a domestic partner or the partner’s relative, a person engaged to marry you, a former relative, or someone with a long-standing, family-like or mentorship relationship with you.

Freddie Mac moved the same direction. Its Bulletin 2022-25 widened the “Related Person” definition to include unrelated individuals with close, family-like ties. Estates and trusts of a Related Person became eligible donors too.

Here is a quick lookup.

The close-friend row is where borrowers get tripped up. A friend you see often isn’t automatically eligible. The standard is a long-standing relationship that looks like family or mentorship. Whether yours fits is a call for the lender reviewing the file, so raise it before the money moves, not after.

Who Cannot Give

Anyone with a stake in the transaction cannot give. The guide says the donor may not be, or have any affiliation with, the builder, the developer, the real estate agent or any other interested party.

This surprises people most with real estate agents. An agent who is also your cousin raises the affiliation question, and it should be sorted out early. A related agent’s commission credit is a separate matter. Confirm that treatment against the guide for your file.

Can the Seller Be the Donor?

Yes, in one specific case. A seller who is also an acceptable donor, such as a parent selling you the family home, can give a gift, provided the seller has no affiliation with another interested party. Fannie Mae Selling Guide Announcement SEL-2023-08 made that change. The same announcement allowed gift funds to come from the estate of an acceptable donor or from a trust the donor established.

A gift or gift of equity from this kind of seller is excluded from interested-party contribution limits. The seller must not be a builder or other interested party. Many borrowers assume a seller can never be the source, and that assumption is wrong for family sales.

What Can Gift Money Pay For?

Gift funds can cover all or part of the down payment, closing costs or financial reserves, subject to the minimum borrower contribution rules. That is the broad answer. The narrow answers matter more.

A gift of equity may not be used for financial reserves. If your lender needs reserves in the file, plan for actual funds, whether your own or a cash gift.

Do You Still Need Your Own Money?

It depends on occupancy, unit count and leverage. This is the part most competing explanations leave vague, so here is the full picture from the Fannie Mae table.

Once the 5% is met, gifts can supplement the down payment, closing costs and reserves.

Now connect that to the leverage available. Across the wholesale programs Lendmire places files with, a first-time buyer on a one-unit principal residence with a fixed rate can reach 97% LTV, which is 3% down. Other buyers on a principal residence reach 95% LTV. Two- to four-unit principal residences also go to 95%, and second homes to 90%. Those are program ceilings, subject to lender guidelines and full file review.

Put it together. A first-time buyer whose parents gift the entire 3% down on a one-unit home needs no own-funds contribution under the agency table. The same gift on a duplex above 80% LTV still leaves the buyer owing 5% of their own money first. Same gift, different answer. Occupancy and unit count decide it. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.

One more point. Because that buyer is above 80% LTV, mortgage insurance applies. It can be cancelled on request at 80% of the original value, with a good payment history, no subordinate liens and no decline in value. The servicer must end it automatically at 78%. A bigger gift-funded down payment can shorten that runway, which is one reason some families gift more than the minimum.

What Is a Gift of Equity, and How Does It Work?

A gift of equity is a credit from a seller who is also an acceptable donor. The seller agrees to a sale price below the home’s value, and the difference acts as the buyer’s down payment. No cash changes hands for that portion.

Mechanically, a gift of equity works like a price reduction. The appraised value and the stated sale price drive the LTV, and the LTV drives the minimum-contribution test above. The donor of a gift of equity is not considered an interested party to the transaction under Fannie Mae’s guide.

Documentation differs from a cash gift. Freddie Mac requires a gift of equity to appear on the Settlement/Closing Disclosure. Expect the file to carry the signed gift letter and the settlement statement showing the credit. Gift of equity rules also differ by loan program, so a family that plans one on an FHA or VA loan should not assume conventional rules carry over.

Remember the limits. It can’t fund reserves, and it isn’t available on an investment property.

How the Gift Is Documented, Step by Step

A signed letter and proof of transfer are both required. Neither one alone is enough.

1. Confirm the donor is eligible. Check the relationship category and confirm no tie to the builder, agent, developer or other interested party.

2. Collect a signed gift letter. Freddie Mac’s feedback messages list the contents: the donor’s name, mailing address, phone number, relationship to you, the actual or maximum gift amount, and a statement that repayment is not required. Fannie Mae’s version also looks for the transfer date. When the gift comes from a trust or estate, the acceptable donor signs and names it.

3. Move the funds in a traceable way. Freddie Mac’s Loan Product Advisor feedback messages call for evidence that the gift was deposited in your account or transferred from the donor’s account to yours or to the closing agent.

4. Expect donor verification. Fannie Mae’s guide includes a section on verifying donor availability of funds and the transfer. Cash handed over in an envelope leaves no paper trail, so plan on a documented bank-to-bank transfer instead.

5. Hand the lender everything early. A missing transfer record is the classic late-stage snag.

Why the fuss? A loan would add to your debt-to-income ratio, and a gift doesn’t. The letter’s no-repayment statement is what separates the two. A quiet side promise to pay the money back undermines the whole file, so don’t make one.

Edge Cases Where the General Rule Bends

Investment property. Gifts and gifts of equity are not allowed. If the home isn’t your principal residence or second home, the gift plan fails.

Wedding and graduation gifts. Freddie Mac allows gifts from unrelated persons for these occasions on a primary residence. Deposit-window requirements tied to the event date have differed across sources and over time, so check the current guide with your lender and don’t rely on a number you read elsewhere.

Household members. Guidance from mortgage insurers indicates that a gift from a long-term household member or a fiancé(e) may count as your own funds toward a minimum contribution, if both will occupy the home as a principal residence. This is secondary commentary, so treat it as a question for the lender, not a plan.

Different programs. FHA, VA and USDA each have their own donor and gift-of-equity rules. A donor who works on one program may not on another.

Lender overlays. An individual lender can be stricter than the agency guide. Your file is reviewed against both.

A Few Scenarios in Plain Terms

A parent gifts a first-time buyer’s down payment. One-unit principal residence, fixed rate, 97% LTV. The agency table asks for no own funds. The parent signs the letter, moves the money by bank transfer, and the buyer keeps the statements. This is the cleanest version. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.

A close friend wants to help. Eligibility turns on whether the friendship is long-standing and family-like or mentorship-based. The friend can’t be the agent, builder or anyone else tied to the deal. If the relationship is real but hard to describe, the letter should state it plainly, and the lender decides.

A duplex purchase above 80% LTV. The buyer must bring 5% from their own funds. After that, gifts can supplement the rest of the down payment, closing costs and reserves. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

A grandparent sells to a grandchild at a reduced price. This is a gift of equity from an acceptable donor who is also the seller. It reduces the effective price, shows on the Closing Disclosure, and cannot be counted toward reserves. If you want to see how stacking gifts with a low down payment can work, Lendmire’s article How to Qualify for a Low Down Conventional Loan Using Gift Funds goes deeper.

Key Terms Defined

Acceptable donor: A person the agency guide allows to give gift funds, generally a relative or someone with a documented family-like tie, with no stake in the transaction.

Interested party: Anyone with a financial stake in the sale, such as the builder, developer or real estate agent.

Gift of equity: A seller-donor’s credit that lowers the sale price below market value, serving as the buyer’s down payment.

Minimum borrower contribution: The portion of the purchase the buyer must pay from their own funds before gifts can be applied.

LTV: Loan-to-value, the loan amount as a percentage of the home’s value or price, whichever the guide uses for the loan.

Reserves: Funds left in the buyer’s accounts after closing, which some files must show.

Common Mistakes to Avoid

• Moving the money before confirming the donor qualifies.
• Treating the gift letter as the finish line when the lender also needs the transfer record.
• Depositing a large amount with no documented source on the donor side.
• Assuming a gift of equity can cover reserves.
• Using gift money on a property that is really an investment.
• Promising repayment, even informally.

Donors may also have questions about tax reporting. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit. A donor can also check with the IRS.

What the Decision Looks Like in Practice

Start with occupancy and unit count, because they decide whether you need your own funds. Then check the donor against the list above. Then gather the letter and the transfer record before the money moves, not after.

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. Reach the team at 828-256-2183.

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

About Lendmire

Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. 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. Freddie Mac Guide Bulletin 2022-25

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

4. Freddie Mac Loan Product Advisor feedback messages