Using Gift Funds for a Down Payment in Washington State: What You Need to Know

One of the most common ways home buyers get help with a down payment is through gift funds from family members. If your parents, grandparents, or other relatives want to help you buy a home, gift funds can be a legitimate and well-documented source of funds for down payment and closing costs — as long as you follow the rules.

Here’s what you need to know about using gift funds for a mortgage in Washington State, including how requirements differ by loan program and what documentation is required.

What Are Gift Funds?

Gift funds are money provided to a home buyer by a family member, employer, or eligible organization with no expectation of repayment. This is a critical distinction — if the funds are actually a loan that needs to be repaid, they cannot be treated as a gift for mortgage qualifying purposes and must be disclosed as a liability.

The gift giver will be required to sign a gift letter confirming the amount, the relationship to the borrower, and that no repayment is required. Documentation of where the funds came from is also required — lenders need to confirm the money is not coming from a party with an interest in the transaction, such as the seller, real estate agent, or builder.

Who Can Provide Gift Funds?

Acceptable gift sources vary by loan program, but generally include:

• Family members — parents, grandparents, siblings, aunts, uncles, and in some cases close family friends with a documented relationship
• Employers (in some circumstances)
• Charitable organizations (subject to program-specific rules)
• Government agencies or public entities offering down payment assistance

Gifts from the seller, listing agent, buyer’s agent, or anyone else with a financial interest in the transaction are never permitted.

Gift Fund Requirements by Loan Program

FHA Loans

FHA has the most flexible gift fund guidelines of any standard loan program. Key points:

• Gift funds can cover the entire down payment — the borrower does not need to contribute any of their own funds toward the minimum 3.5% down payment
• Gift funds can also be used toward closing costs
• Acceptable donors include family members, employers, close friends with a documented relationship, and charitable organizations
• HUD requires a clear paper trail documenting that funds belong to the donor and are not from an interested party

Conventional — Fannie Mae and Freddie Mac (Standard)

Standard conventional guidelines allow gift funds but have historically had more restrictions than FHA. The key rule:

• If the down payment is less than 20%, the borrower must contribute at least 5% of their own funds — gifts cannot cover this minimum personal contribution
• If the down payment is 20% or more, the entire down payment can be gifted — no personal funds requirement
• Gift funds may be used toward closing costs in addition to the down payment above the 5% threshold
• Acceptable donors are limited to family members — employers and charitable organizations are generally not eligible for standard conventional loans

Conventional — HomeReady, Home Possible, and HomeOne

Low down payment conventional programs each have slightly different gift fund rules — and the differences matter for buyers relying heavily on family help.

Fannie Mae HomeReady and Freddie Mac Home Possible both allow:

• 100% of the down payment to be gifted — no minimum borrower contribution required, even with less than 20% down
• Gift funds from family members toward both down payment and closing costs

Freddie Mac HomeOne is more restrictive. Although it has no income limits — making it appealing for first-time buyers who don’t qualify for Home Possible due to income — at least one borrower must contribute 3% of their own funds when the down payment is less than 20%. Gift funds can cover the remainder but cannot cover the entire down payment on their own.

This distinction is worth knowing upfront. A buyer drawn to HomeOne because of its no-income-limit feature may be surprised to learn they still need some personal funds in the transaction, even if family is helping generously. Comparing HomeReady and Home Possible alongside HomeOne is worth doing before committing to a program.

VA Loans

VA loans do not require a down payment, so gift funds are most commonly used toward closing costs rather than down payment. Gift funds from family members are permitted. Since VA loans typically involve no down payment, the gift fund question is less central than with other programs — but having gift funds available to cover closing costs can be very helpful.

USDA Loans

USDA loans also do not require a down payment. Gift funds from family members can be used toward closing costs and any required reserves. Documentation requirements are similar to other programs — a gift letter and paper trail are required.

How to Document Gift Funds

Regardless of the loan program, documentation is essential. Lenders need to verify that the funds exist, belong to the donor, and are not a disguised loan or contribution from an interested party.

Standard documentation requirements include:

• Signed gift letter from the donor stating the amount, the relationship to the borrower, the property address, and that no repayment is required
• Donor’s bank statement showing the funds are available in their account
• Evidence of the transfer — typically a copy of the wire confirmation, cashier’s check, or bank statement showing the withdrawal and deposit

If gift funds are already in the borrower’s account at the time of application, the lender will need to document the deposit — typically with a copy of the donor’s bank statement showing the withdrawal and the borrower’s bank statement showing the corresponding deposit.

Cash is never an acceptable form of gift funds. All gift fund transfers must be traceable through the banking system.

A Note on Gift Tax

For 2026, the annual gift tax exclusion is $19,000 per donor per recipient. This means each parent can gift up to $19,000 to a child without triggering gift tax reporting requirements — a combined $38,000 from two parents. If gifts to both a child and their spouse are involved, the total could reach $76,000 without gift tax implications.

Gifts above this amount are not necessarily taxed — they may simply need to be reported and applied against the donor’s lifetime exemption. Always encourage gift donors to consult with their tax advisor before transferring large amounts.

Note that mortgage lenders are not concerned with the tax implications of gift funds — their only requirement is documentation that the funds are genuinely a gift and not a loan.

Tips for a Smooth Gift Fund Process

• Start early. If gift funds need to be transferred and documented, build in time before closing to get the paper trail in order.
• Keep everything. Photocopy or save digital copies of every document related to the gift — the letter, the bank statements, the transfer confirmation. More documentation is always better than less.
• Don’t deposit and move money. If gift funds are deposited into one account and then transferred to another, each step needs to be documented. Keep it simple — transfer directly to the account that will be used for closing.
• Tell your loan officer upfront. If you’re planning to use gift funds, mention it at the beginning of the process. It affects which loan program is best for your situation and what documentation will be needed.
• Never call a loan a gift. If the money is expected to be repaid — even informally — it must be disclosed as a liability, not a gift. Misrepresenting a loan as a gift is mortgage fraud.