Can You Use Gift Money for Your Down Payment as a First-Time Home Buyer?

Saving for a down payment is one of the biggest hurdles standing between you and your first home. If you have family members or close friends willing to help, you might be wondering whether you can actually use that money toward your purchase.

TL;DR: Yes, first-time home buyers can use gift money for their down payment, but there are specific rules about who can give the gift, how it must be documented, and what loan type you are using. Understanding these requirements upfront will save you headaches during the mortgage process and help you close on your new home without delays.

Why Lenders Care About Where Your Down Payment Comes From

Here is something that surprises a lot of first-time buyers: your lender is going to ask where every dollar of your down payment originated. This is not them being nosy. They need to verify that the money sitting in your account is actually yours to use and not a hidden loan that would increase your debt load.

When you receive a large deposit that does not match your normal income pattern, it raises questions. Lenders want to make sure you are not borrowing money from someone and calling it a gift. If that money needs to be repaid, it changes your debt-to-income ratio and affects how much mortgage you can actually afford.

This is why gift letters and documentation exist. They protect you and the lender by creating a clear paper trail.

Who Can Give You Gift Money for a Down Payment?

The answer depends on what type of mortgage you are getting. Each loan program has its own rules about acceptable gift donors.

Conventional Loans

Conventional loans are the most restrictive when it comes to gift sources. Your gift money must come from:

• A family member (parent, grandparent, sibling, spouse, domestic partner)

• A fiancé or fiancée

That is pretty much it. Friends, employers, and charitable organizations do not qualify for conventional loan gifts. Also, gift funds cannot be used if you are purchasing an investment property.

FHA Loans

FHA loans open the door to more gift sources, which is one reason they remain popular with first-time buyers. Acceptable donors include:

• Family members

• Close friends with a documented relationship

• Your employer or labor union

• Charitable organizations

• Government agencies with homeownership assistance programs

This flexibility makes FHA loans a solid option if your gift is coming from someone outside your immediate family.

VA Loans

If you are eligible for a VA loan, you can receive gift money from almost anyone who is not directly involved in the transaction. That means your real estate agent, lender, or the home builder cannot gift you money, but nearly everyone else can.

VA loans do not require a down payment, but gift funds can still help cover closing costs or the funding fee if you prefer not to roll it into your loan.

USDA Loans

USDA loans also allow gifts from anyone without a financial interest in the sale. However, these funds can only go toward closing costs. They cannot count as financial reserves since you did not save that money yourself.

What Is a Gift Letter and Why Do You Need One?

A gift letter is a formal document that proves the money you received is a gift and not a loan. Your lender will require this before they can count those funds toward your down payment or closing costs.

Every gift letter needs to include:

• The exact dollar amount of the gift

• The donor's name, address, and phone number

• The donor's relationship to you

• A clear statement that no repayment is expected or required

• The donor's signature and the date

Some lenders provide a template for this letter. If yours does not, ask them exactly what information they need so you do not have to redo it later.

How to Document the Transfer of Gift Funds

The gift letter is only part of the equation. You also need to show proof that the money actually moved from the donor to you. Acceptable documentation typically includes:

• A copy of the donor's bank statement showing the withdrawal

• A copy of your bank statement showing the deposit

• A copy of the check or wire transfer confirmation

• If the gift goes directly to the title company, a copy of that payment

The key is creating a clear trail that shows the money came from the donor's account and landed where it was supposed to go. Missing documentation is one of the most common reasons for closing delays, so get this squared away early.

Can You Pay Back a Down Payment Gift?

No. By definition, a gift is not a loan. If you plan to repay the money, it is not a gift, and your lender will treat it as debt.

This is exactly why the gift letter must state that no repayment is expected. If your lender discovers that you have an informal agreement to pay back your family member, it changes your entire financial picture and could jeopardize your loan approval.

Be honest about this from the start. If someone wants to help you but expects repayment, that is a personal loan, and it needs to be disclosed as such.

Are Down Payment Gifts Taxed?

The gift itself is not taxed as income to you. However, the IRS does have rules about gift tax that apply to the person giving the money.

For 2026, the annual gift tax exclusion is $18,000 per recipient. If someone gives you more than that amount, they may need to file a gift tax return. In most cases, they will not actually owe tax because of the lifetime gift tax exemption, but the paperwork is still required.

This is the donor's responsibility, not yours. But it is worth mentioning to whoever is helping you so they are not caught off guard at tax time.

What If You Do Not Have Anyone to Gift You Money?

Not everyone has family members in a position to help financially. If that describes your situation, you still have options.

Down Payment Assistance Programs

Michigan has several down payment assistance programs designed specifically for first-time buyers. These programs can provide grants or low-interest loans to help cover your down payment and closing costs. Eligibility often depends on your income, the home's location, and whether you are a first-time buyer.

Low Down Payment Loan Options

You might need less money than you think. FHA loans require as little as 3.5 percent down. Some conventional loan programs for first-time buyers allow down payments as low as 3 percent. VA and USDA loans require no down payment at all if you qualify.

Save Strategically

If buying is not urgent, consider giving yourself more time to save. With savings account interest rates higher than they have been in years, your money can grow faster while you prepare. Even six months of focused saving can make a meaningful difference.

Common Mistakes to Avoid With Gift Funds

I have seen buyers run into problems that could have been avoided with a little planning. Here are the most common mistakes:

Depositing the gift too late. Lenders want to see funds seasoned in your account. Depositing a large gift right before closing raises red flags and can delay your loan.

Missing documentation. If you cannot prove where the money came from, your lender cannot count it. Get the gift letter and bank statements organized before you need them.

Not disclosing the gift. Trying to hide a gift or misrepresent it as your own savings is mortgage fraud. Be upfront about every dollar.

Assuming any gift source is acceptable. As we covered, different loan types have different rules. Verify with your lender before accepting money from anyone.

How to Make the Process Smooth

If you know a gift is coming, communicate with your lender early. Let them know the amount, the source, and when you expect to receive it. They can tell you exactly what documentation you will need and help you avoid surprises.

Have the donor prepare the gift letter before transferring the money. Get copies of all bank statements showing the withdrawal and deposit. Keep everything organized in one place so you can provide it quickly when your lender asks.

The more prepared you are, the faster your loan can move through underwriting.

Take the Next Step Toward Homeownership

Understanding how gift money works is just one piece of the puzzle. The mortgage process has a lot of moving parts, and having someone in your corner who can guide you through each step makes all the difference.

If you are a first-time buyer in Michigan trying to figure out how to make homeownership work for your situation, I would be happy to walk you through your options. Whether you have gift funds available or need to explore down payment assistance programs, we can map out a plan that fits your goals.

Schedule a free Practice Purchase consultation at michiganmortgagesolutions.com/home-purchase-consultation or call (248) 963-1894. We will look at your specific situation and help you understand exactly what it takes to get into your first home.