What Are Gift Funds? A Deep Dive for Homebuyers

When it comes to buying a home, one of the biggest hurdles for many borrowers is the upfront cost—specifically, the down payment and closing costs. That’s where gift funds can come in and make a huge difference.

Gift funds are exactly what they sound like: money given to a borrower by someone else—typically a family member—to help cover some or all of these upfront expenses. But here’s the key: while gift funds can be a fantastic option, they come with very specific rules. If they’re not handled the right way, they could delay or even derail a loan approval.

Let’s break it down.

Who Can Provide Gift Funds?

Most loan programs allow gift funds from a close relative. This usually includes:

• Parents or grandparents
• Siblings
• Children
• Spouses or domestic partners
• Legal guardians

Some programs may also allow gifts from fiancés or even close friends with a documented relationship. But not all sources are acceptable. For example, employers, real estate agents, or sellers typically can’t provide gift funds—unless it’s part of a documented and approved assistance program.

Always check with your loan officer to confirm who qualifies under your specific loan type.

What Can Gift Funds Be Used For?

Gift funds can typically be applied to:

• Down payment
• Closing costs
• Reserves (in some cases)

That said, not all loan types allow gift funds for every purpose. Some require the borrower to contribute a minimum amount of their own funds, especially for investment properties or certain loan programs.

How Must Gift Funds Be Documented?

Here’s where things get serious. For gift funds to be allowed, they need to be properly verified. That means:

Signed gift letter – This letter must include:

• Donor’s name and relationship to the borrower
• Amount of the gift
• Statement that the funds are a gift, not a loan
• Donor’s signature
• Proof of transfer – Lenders typically want to see:
• Evidence the donor had the funds (e.g., a bank statement)
• Evidence the funds were transferred to the borrower (e.g., a wire transfer, canceled check, or deposit slip)
• No repayment expected – The gift letter must clearly state the money is not to be repaid. Any hint of repayment can trigger issues with loan eligibility.

Tip: Transferring large sums of money without documentation or explanation can raise red flags. Always coordinate with your lender before moving gift funds into your account.

Common Mistakes to Avoid

I’ve seen this go sideways more times than I can count. A few red flags to watch out for:

• Depositing cash without a paper trail – If your aunt hands you $10,000 in cash for your down payment, that’s going to be a problem unless it’s properly sourced.
• Mixing gift funds with other funds – Keep it clean. Try not to mix gift funds with your own money until after documentation is provided.
• Waiting too long – Trying to document gift funds at the last minute can cause delays. Loop in your lender early.

Why Documentation Matters

Lenders are required to verify the source of all funds used in a mortgage transaction. This is part of anti-fraud and anti-money laundering regulations, but it also protects you. By ensuring everything is above board, your lender helps keep your loan on track—and your closing date intact.

Gift funds can be an incredible tool to help you get into a home, but they must be transparent, traceable, and properly documented.

Final Thoughts

If a family member wants to help you buy a home, gift funds can be a meaningful way to make that happen. But they’re not as simple as handing over a check. The process requires intentional planning, clear documentation, and early communication with your lender.

If you’re thinking about using gift funds—or if someone has offered to help—let’s talk through the details together. I’ll help you navigate the process so everything’s done right.

Because when it comes to mortgage approvals, the details matter.

About Ruoff Mortgage

At Ruoff Mortgage, we understand that buying a home is one of life’s biggest moments – not just as a financial decision, but a personal one. For more than 41 years, we’ve proudly helped families turn their dreams into reality. From our roots in northeast Indiana to now serving homebuyers throughout the Midwest, our focus has stayed the same: delivering exceptional service rooted in care, speed, and community. With an average 15-day clear-to-close time, our team is here to make your journey to homeownership as smooth and stress-free as possible. When you're ready to take the next step, we’re here to walk with you, every step of the way.