Conventional Loan Documentation for a Buyer Using Gift Funds

The Quick Read: A gift-funded conventional file is the standard loan file plus three extras: a signed gift letter, proof the donor’s money exists and moved, and a check that the donor is eligible. The gift can cover the down payment, closing costs, and sometimes reserves. Whether it can cover everything depends on your occupancy, your unit count, and your loan-to-value ratio (LTV, the loan amount as a percentage of the home’s value). Tell your loan officer about the gift before any money moves.

What Is Conventional Loan Documentation When a Gift Is Involved?

Conventional loan documentation is the paper file a lender builds to prove your income, assets, credit, and the property. A gift adds one more branch to that file. Everything else stays the same.

Here is the split most first-time buyers miss. You supply some documents: pay records, bank statements, the gift letter. The donor supplies others: proof of their funds or the transfer. The lender orders the rest, including your credit report and the appraisal.

Programs differ, and your lender may ask for more. The mechanics below reflect how I see these files handled across the wholesale conventional programs we place files with.

Who Can Give You Gift Money?

Only certain donors work on a conventional loan. Under the Fannie Mae Selling Guide’s personal gifts rules, an acceptable donor is a relative: your spouse, child, dependent, or anyone related by blood, marriage, adoption, or legal guardianship. Family-like ties can qualify too, such as a domestic partner or the partner’s relative.

Fannie Mae widened that list in announcement SEL-2022-08. It added a former relative, a relative of a domestic partner, and a godparent. Freddie Mac uses a term, “Related Person,” and widened it to include unrelated people with close, family-like ties. The two agencies define donors a little differently, and individual lenders add their own rules.

Who is out? A close friend with no family-like tie generally does not fit. Neither does anyone connected to the deal. The donor cannot be, or be affiliated with, the builder, the developer, the real estate agent, or any other interested party.

One wrinkle: a seller can now be an acceptable donor if they qualify as a relative and have no tie to another interested party. Gift funds may also come from the estate of an acceptable donor, or a trust the donor set up.

How Much of Your Own Money Do You Need?

It depends on occupancy, unit count, and LTV. Per the same Fannie Mae guidance:

Now match that to the leverage limits. On a one-unit home you will live in, conventional purchase loans run to 97% LTV (3% down) when at least one borrower is a first-time buyer on a fixed rate, and 95% LTV (5% down) otherwise. Two- to four-unit principal residences go to 95%. Second homes go to 90%. Those figures are subject to lender guidelines and full file review.

Mortgage insurance applies above 80% LTV. You can request cancellation at 80% of the original value, with good payment history, no second liens, and no drop in value. The servicer must end it automatically at 78%. A bigger gift lowers the loan, which can shrink or remove that insurance. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

One more rule: gifts are not allowed on investment property. If occupancy is anything other than your home or a true second home, the gift route closes.

The Gift Letter: What It Must Say

A gift letter is a short signed statement that the money is a gift. Fannie Mae’s required content is the actual or maximum dollar amount, the donor’s statement that no repayment is expected, and the donor’s name, address, phone number, and relationship to you. Freddie Mac asks for the same elements and wants the donor’s signature.

Why the repayment language matters: a “gift” you must pay back is a loan. It becomes debt and enters your debt-to-income ratio, the share of monthly income that goes to debt payments. The Consumer Financial Protection Bureau says the same in plain terms: you must prove where the money came from and submit a signed statement that it is a gift, not a third-party loan.

If the final amount changes, tell your loan officer. The lender may need a revised letter.

The letter alone is not enough. That is the most common misunderstanding I see.

How the File Is Underwritten, Step by Step

1. Disclose early. Tell your loan officer about the gift before it moves.

2. Confirm the donor. Check the relationship and make sure there is no tie to the seller, builder, or agent.

3. Check your minimum contribution. Use the table above.

4. Collect the signed gift letter.

5. Verify the donor’s funds or the transfer. The lender must see enough money in the donor’s account, or see that it has already moved to yours. The account can be checking, savings, investment, or the donor’s trust or estate account.

6. Handle your own statements. The lender reviews your bank statements for large deposits. Under Fannie Mae’s depository accounts rules, a large deposit is a single deposit above 50% of your total monthly qualifying income. Unverified funds cannot be used for the down payment, closing costs, or reserves.

7. Match the closing paperwork. The Closing Disclosure and settlement statement should show the gift amounts.

Two Ways to Move the Money

You have two paper-trail options. Both work when documented.

Fannie Mae accepts electronic-transfer evidence. Either way, the trail runs from the donor’s account to your account or to the closing agent. Cash handed over in person leaves no trail. Skip it.

A deposit with a gift letter and donor proof is a documented gift. Same money, very different file. Gather the paper before the lender asks.

Earnest money works the same way. On Freddie Mac loans, a donor can pay the earnest money directly when the transfer from their account is documented. If gift funds pay it, the lender records it as a gift, not as your earnest money.

Where the General Rule Breaks

Gift of equity. This is a credit from a seller who is an acceptable donor, representing part of their equity in the home. Fannie Mae’s gift of equity guidance allows it on principal residence and second home purchases. The file needs a signed gift letter and a settlement statement listing the gift. It cannot be used for reserves. Because it rests on the contract price against the home’s value, the appraisal affects how much equity can be gifted. Your loan officer can confirm how a given lender handles that.

A donor who lives with you. If the donor has lived with you for the last 12 months and you both will occupy the home as a principal residence, the gift can count as your own funds toward the minimum contribution. That language comes from an archived version of the Fannie Mae guide, so have your loan officer confirm the current rule.

Wedding gifts. Freddie Mac accepts them on a principal residence. The deposit must land within a short window after the marriage license date, so confirm the exact window with your lender.

Business-owned donors. Freddie Mac accepts a business owned by a Related Person, with extra signatures on the letter. Lender overlays vary.

HomeReady and Home Possible. These programs carry an income limit of 80% of area median income. Their gift and contribution rules sit in separate guide sections, so ask your loan officer before assuming the standard table applies.

Refinances. Gifts are rarely part of a refinance, and the rules differ. Don’t assume the purchase rules carry over.

Other loan types, such as FHA or VA, allow different donors. Those rules don’t apply to a conventional loan.

Common Mistakes

• “Any friend can give me gift money.” On a conventional loan, donors are relatives or family-like ties. Not close friends.
• “The letter is all I need.” The lender also needs the donor’s funds or the transfer verified.
• “I’ll deposit it and explain later.” Unverified funds cannot be used.
• “A gift covers everything on any purchase.” Not on a two- to four-unit or second home above 80% LTV.
• “A gift of equity pays my reserves.” It cannot.
• “Gift tax lands on me.” Gift tax is the donor’s matter. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit. Donors should do the same. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.

An unexplained deposit, a mismatched amount, or a late transfer can hold up your closing. Match the letter, the transfer, and the closing paperwork to the dollar.

What the Donor Needs From You

Keep this short and clear for them. They sign the letter. They provide proof of funds or a transfer record, such as a statement page showing the account and the amount. They should not expect to repay or be repaid. And they may want to talk to a tax professional first.

Give them the list early. Donors are doing you a favor, and a vague request leads to delays.

How the Decision Looks in Practice

Picture a first-time buyer purchasing a one-unit home to live in, at 97% LTV, with a parent giving the 3% down payment. Under the Fannie Mae rules above, no own-funds minimum applies on a one-unit principal residence. The file needs the parent’s signed letter, proof of the parent’s funds or the transfer, and a clean paper trail into the buyer’s account or the closing agent. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.

Change one fact. The same buyer purchases a duplex to live in, above 80% LTV. Now 5% must come from the buyer’s own money. The gift covers the rest. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.

Same donor, same love, different file. Occupancy and unit count decide it.

That is why the conversation with your loan officer should come first. Lendmire arranges these files through wholesale lenders, and the team can walk through conventional loan programs with you before money moves. Buyers with larger loan amounts can read Lendmire’s piece How to Document Gift Funds for a Jumbo Loan as a High-Earning W-2 Buyer. All program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.

Key Terms Defined

LTV (loan-to-value): The loan amount as a percentage of the home’s value.

Gift letter: A signed statement from the donor that the money is a gift with no repayment expected.

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

Large deposit: A single deposit above 50% of your total monthly qualifying income, which the lender will ask you to source.

Reserves: Money left in your accounts after closing, which some files must show.

Mortgage insurance: Coverage that protects the lender if you fall behind, required above 80% LTV on conventional loans. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.

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.

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

About Lendmire

Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. 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 SEL-2022-08

3. CFPB: Where can I get money for a down payment on a home?

4. Fannie Mae Selling Guide B3-4.2-02 Depository Accounts

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