Giving your child money toward a down payment can help them save money and borrow less when buying a home. This can be especially helpful when they’re dealing with soaring home prices and high interest rates. But before you hand over the cash, you should understand the rules and tax implications of this kind of gift.
[Read: Best Mortgage Lenders]
How To Gift a Down Payment for a House
There are two ways to provide a gift to buy a home: Send the funds to the title company to be put in escrow, or gift them to your child directly.
In the first scenario, “the donor signs a letter that confirms the amount of the gift and — most importantly — that it is truly a gift and does not require repayment,” says Chris Chudacoff, president and broker at California-based True Point Lending.
In the second scenario, “the donor sends the money directly to the buyer — but that requires more paperwork,” says Chudacoff. That includes bank statements that prove the funds were moved. “Option No. 1 is always advisable up front.”
Decide How Much To Give
How much you want to give will depend on your finances and your generosity, but the amount can also affect your child’s purchasing power and monthly mortgage payment. Think of the down payment in terms of a percentage of the total loan amount.
For example, if your child is buying a $400,000 home with a conventional mortgage, a 5% down payment would be $20,000. On the other hand, a 20% down payment on a $400,000 home would be $80,000, meaning your child would only need to borrow $320,000 instead of $380,000. Plus, mortgages with down payments of 20% or more usually don’t require private mortgage insurance.
Document the Gift
Once you’ve decided to give the funds and how much you’d like to give, document that gift in the form of a letter. Gift letters are usually required by mortgage lenders and typically include these key details:
— The donor’s name
— The donor’s relationship to the recipient
— The donor’s mailing address and phone number
— The amount of the gift funds
— Confirmation that the gift does not need to be repaid
Limits and Rules on Down Payment Gifts
Rules and requirements for down payment gifts vary by mortgage program. Typically, you can’t be affiliated with the builder, real estate agent or anyone else involved in the transaction, and borrowers generally cannot use gift funds to buy investment properties.
FHA Loans
For Federal Housing Administration loans
, gift funds must come from acceptable sources such as:
— A relative (such as a parent)
— A close friend
— A labor union
— An employer
— A charitable organization
If the funds have been transferred to your child’s account, the lender will need a bank statement from you showing the withdrawal and a deposit slip, along with a bank statement from your child showing the deposit. If the funds will be provided at closing, you’ll need to provide a copy of the canceled personal check or certified check, or documentation for a wire transfer.
[Read: Best FHA Loans.]
VA Loans
With a loan backed by the U.S. Department of Veterans Affairs, military members and veterans can borrow for a new home and use gift funds from almost anyone — they don’t have to be a close friend or family member.
Funds must be documented with a gift letter, and the lender will need documentation, such as a canceled check or bank statement, verifying that your child received the funds.
USDA Loans
Loans backed by the U.S. Department of Agriculture can use gift funds as a down payment, and they don’t have to come from a family member. These mortgages, used to purchase homes in designated rural areas, will require a gift letter and documentation of the withdrawal from your account to your child. They cannot simply claim that cash on hand was a gift.
Fannie Mae and Freddie Mac Conforming Loans
Conventional loans that conform to Fannie Mae or Freddie Mac guidelines can accept gift funds for part or all of a down payment, provided the giver is related “by blood, marriage, adoption or legal guardianship.” A gift can also come from a fiancé, godparent or domestic partner.
If the borrower is putting down less than 20% and buying a home with two or more units (or a second home), at least 5% of the down payment must come from their own funds.
Tax Implications for Homebuyers Receiving Down Payment Gifts
In most scenarios, the IRS does not view down payment gifts as taxable income for the recipient. However, those who are gifting large sums of money may be required to file a gift tax if they exceed the annual gift tax exclusion.
How To Avoid the Gift Tax
For 2025, the federal gift tax only applies to amounts over $19,000 per individual per year, or $38,000 for couples filing jointly. But compared with the necessary down payment on a typical mortgage, $19,000 may not feel like enough.
Chris Thomas, a mortgage loan originator with Michigan-based Iris Mortgage, points out that there is a “five-year rule” for gift tax exclusions that can help parents give away larger amounts. The five-year rule allows a person to use five years’ worth of gifts (at the current $19,000 annual exclusion) in one year, totaling $95,000, says Thomas.
According to Thomas, the $95,000 limit is per individual, so each parent could gift up to $95,000 apiece, as could grandparents, which “could really help make a significant down payment without penalty or filing.”
He adds, “It’s always advisable to consult with a tax or financial professional for personalized advice on gifting and estate planning strategies.”
[See: Best Low- and No-Down-Payment Mortgages]
Alternatives to Gifting a Down Payment
If you can’t or don’t want to gift the funds for a down payment, there may be other ways you can help your child buy a home:
— Gift closing costs. Closing costs can be between 3% and 5% of the loan cost, which may be a more affordable gift depending on your finances.
— Find down payment assistance. Help your child search for down payment assistance programs they can qualify for. These provide help in the form of grants, forgivable loans and other aid.
— Buy the home yourself. If you buy the home for your child to live in, there will be different tax and loan implications because you won’t be the primary occupant. Check with a certified public accountant who can discuss the impact with you.
— Join your child as a co-borrower. According to Chudacoff, there are risks with this method — especially if your child misses payments or you’d like to buy another house in the future. Check in with a CPA and make sure you know the pros and cons of co-owning a house.
— Shop for different lenders. There may be other loan options that let your child buy a home with a lower out-of-pocket barrier.
— Borrow from retirement. “You have five years to pay it back without penalties (if you borrow from a 401(k)),” says Thomas. However, be aware that removing funds from your retirement accounts means you won’t be earning returns, and it could impact your future plans.
Regardless of how you’d like to help, it’s a good idea to speak with a financial advisor and tax professional to make sure you understand the effects your gift will have on your and your child’s finances.
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What to Know Before Gifting a Down Payment originally appeared on usnews.com
Update 01/21/26: This story was previously published at an earlier date and has been updated with new information.