FHA vs Conventional with Gift Funds
Both FHA and conventional allow 100 percent of the down payment to come from gift funds on a primary residence. The donor list, source documentation, and second-home rules differ in small but meaningful ways.
Allowed donor matrix
| Donor | FHA | Conventional |
|---|---|---|
| Parent, grandparent, sibling, child | Yes | Yes |
| Fiance or domestic partner | Yes | Yes |
| Aunt, uncle, cousin | Yes (any relative) | Yes |
| Close friend with documented relationship | Yes (with cleared interest documentation) | No |
| Employer or labour union | Yes | No |
| Charitable organisation | Yes | Yes (if approved) |
| Governmental DPA programme | Yes | Yes |
| Seller, real estate agent, builder | No (would be a sales concession) | No |
Gift letter and source documentation
Both programmes require these elements:
- Gift letter signed by donor (template available from lender)
- Stated dollar amount and donor relationship
- Explicit statement that funds are a gift with no repayment expected
- Donor bank statement showing the funds in donor account before transfer (typically 30 to 60 days of statement)
- Paper trail: copy of donor cheque or wire confirmation, plus borrower bank statement showing receipt
- Donor source-of-funds explanation if the funds appeared in donor account within the prior 60 days (e.g. donor sold a car, took 401k loan, sold a property)
Second home and investment property
FHA does not finance second homes or investment properties at all (primary residence only). Conventional permits gift funds on a second home but requires the borrower to make a minimum 5 percent contribution from their own funds when LTV exceeds 80 percent per Fannie Mae Selling Guide B3-4.3-04. Investment properties on conventional may not use gift funds for down payment.
Common rejection reasons
- Donor cannot produce source-of-funds documentation
- Cash from donor that was never in a bank account (rejected on both programmes)
- Gift letter signed but not dated, or missing relationship statement
- Funds in borrower account labelled as gift but no paper trail from donor
- Donor relationship that does not meet Fannie / FHA list (e.g. friend of friend on conventional)
Tax disclaimer
Gifts above the IRS annual exclusion (approximately $19,000 per donor per recipient in 2026) may require donor to file IRS Form 709. Consult a CPA. Mortgage rules are separate from gift-tax rules.
Sources
- HUD Handbook 4000.1 Section II.A.4.d (Acceptable Sources of Funds): HUD 4000.1
- Fannie Mae Selling Guide B3-4.3-04 (Personal Gifts): selling-guide.fanniemae.com
- Freddie Mac Seller Guide 5501.3 (Personal Gifts): guide.freddiemac.com
- IRS Form 709 (Gift Tax): irs.gov/form-709
Related: closing costs | DPA programmes