How Much Can Parents Gift for Down Payment?

A down payment gift is financial assistance provided by one individual to another, typically a parent to their child, to help with the upfront costs of purchasing a home. This practice is a common way for families to support loved ones in achieving homeownership, which can significantly reduce the financial burden of purchasing a property. This financial contribution is distinct from a loan, as there is no expectation of repayment from the recipient. Understanding the specific rules and requirements surrounding these gifts is important for both the donor and the recipient to ensure a smooth home buying process.

Understanding Gift Tax Rules for Donors

When parents provide a financial gift for a down payment, they must be aware of federal gift tax regulations. The Internal Revenue Service (IRS) establishes an annual gift tax exclusion, which for calendar year 2025 is $19,000 per recipient. This means an individual can gift up to this amount to any number of people each year without needing to report the gift to the IRS or incur gift tax consequences.

For married parents, this annual exclusion can effectively double. Each parent can gift $19,000 to the same recipient in a year, allowing a combined total of $38,000 to be transferred without triggering a reporting requirement or immediate tax implications.

Should a gift exceed the annual exclusion amount, the donor is generally required to file IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. Filing this form does not necessarily mean a gift tax will be owed. Instead, the amount exceeding the annual exclusion reduces the donor’s lifetime gift tax exemption.

The lifetime gift tax exemption for 2025 is $13.99 million per individual. Most people will not pay federal gift tax during their lifetime, even if they make gifts exceeding the annual exclusion. The recipient of the gift does not pay income tax on the gifted funds.

Mortgage Lender Requirements for Gifted Funds

Mortgage lenders have specific requirements when a down payment includes gifted funds, as they need to verify the source and nature of these contributions. A primary requirement is a gift letter, which serves as a formal declaration that the funds are indeed a gift and not a loan that requires repayment. This letter reassures the lender that the homebuyer will not have an additional debt obligation beyond the mortgage, which could affect their ability to make payments.

The gift letter must contain specific details, including the names of the donor and recipient, their relationship, the exact amount of the gift, and a clear statement that no repayment is expected. It should also include the address of the property being purchased, the date the funds were transferred, and the signatures of both the donor and recipient.

Lenders also consider the “seasoning” of gifted funds, which refers to the period the money has been held in the recipient’s bank account. Funds are considered seasoned if they have been in the recipient’s account for at least 60 days, or sometimes 90 days, prior to the mortgage application. If funds are not seasoned, meaning they were recently deposited, lenders will require additional documentation to verify their source.

Verification of the source of funds is an important step in the lender’s process. Lenders require documentation, such as bank statements from the donor, to prove that the gift originated from legitimate, verifiable assets. This helps ensure the money is not from an undisclosed loan or other unacceptable sources, like credit card cash advances or payday loans. Gifted funds must come from a relative by blood, marriage, adoption, or legal guardianship, or a domestic partner or fiancé. Funds cannot come from interested parties in the transaction, such as the seller, real estate agent, or builder.

Documentation and Timing for Down Payment Gifts

Successfully using gifted funds for a down payment requires careful attention to documentation and timing. Optimal timing for the gift transfer can significantly streamline the mortgage application process. Transferring the gifted funds into the recipient’s bank account at least 60 days before applying for a mortgage allows the funds to be “seasoned.” Seasoned funds are already established in the recipient’s account, potentially reducing the amount of scrutiny and additional documentation required by the lender regarding the gift’s origin. If funds are deposited within the 60-day window before application, lenders will specifically ask for documentation to verify the source.

Communicating openly with the mortgage lender early in the process about the intention to use gifted funds is beneficial. This allows the lender to provide specific guidance on their requirements and any necessary forms. They can advise on whether funds should be transferred directly to the recipient’s account or wired directly to the closing agent at the time of closing, which can sometimes reduce the paperwork needed from the donor.

A comprehensive documentation checklist for gifted funds includes the completed and signed gift letter. Lenders will also require bank statements from the donor showing the withdrawal of the gift amount, and corresponding bank statements from the recipient showing the deposit. These statements help create a clear paper trail, demonstrating the legitimate transfer of funds.