When You Need Alternative Funding Sources
Most homebuyers use their savings for down payments and closing costs. But Fannie Mae recognizes that many borrowers need help from other sources to make homeownership possible.
These alternative funding sources become especially important for first-time buyers who haven't had years to accumulate savings. They're also valuable for borrowers buying in expensive markets where even a modest down payment requires substantial cash.
The key requirement across all these funding sources is documentation. Lenders must verify that the money is legitimate and that you're not taking on hidden debt that could affect your ability to repay the mortgage.
Gift Funds from Family Members
Family gift funds are the most common alternative funding source. Parents, grandparents, siblings, and other relatives can give you money for your down payment and closing costs without any repayment requirement.
Say your parents want to give you $50,000 toward your home purchase. They can transfer this money directly from their bank account to yours, or they can send it directly to your closing agent. The gift can cover your entire down payment if you want.
For second homes, there's one restriction. If your loan amount exceeds 80% of the home's value, you must contribute at least 5% of the purchase price from your own funds. Your family can still gift the rest.
The donor must be a "related person" under Fannie Mae's definition. This includes spouses, children, parents, grandparents, siblings, aunts, uncles, nieces, nephews, cousins, stepfamily members, in-laws, adoptive relationships, and domestic partners. It also includes trusts or estates established by these relatives.
Required Documentation for Family Gifts
You need two key documents for family gift funds: a gift letter and proof of the money transfer.
The gift letter must be signed by the person giving you the money. It needs their name, address, and phone number. The letter must state the gift amount and confirm that the money doesn't need to be repaid.
For the transfer proof, you need bank statements showing the money leaving the donor's account and entering yours. If they write you a check, you need a copy of the canceled check. If they wire money directly to your closing agent, you need the wire confirmation.
Third-party payment apps like Venmo or Zelle are acceptable, but only if the documentation clearly shows the money came from the donor's bank account and went to your bank account or closing agent.
Wedding and Graduation Gifts
Fannie Mae makes special exceptions for wedding and graduation gifts. Unlike regular gift funds, these can come from anyone - not just family members.
Your college friends can pool money for a graduation gift toward your house. Wedding guests can contribute to your down payment fund. The key timing requirement is that these gifts must be deposited in your account within 90 days of your wedding date or graduation date.
You'll need your marriage certificate or diploma to prove the timing, plus bank statements showing the gift deposits in your account.
Government Agency Grants and Down Payment Assistance
Many state and local housing agencies offer grants or down payment assistance programs. These funds are eligible for Fannie Mae loans as long as the agency meets certain independence requirements.
The agency cannot be your seller or have any business relationship with your seller. They can't be affiliated with your lender or real estate agent either. This prevents conflicts of interest where parties to your transaction might artificially inflate the home price to accommodate the assistance.
Say your state housing authority offers a $15,000 first-time buyer grant. As long as they're not connected to your seller or lender, you can use this money for your down payment or closing costs.
These agency funds are only available for primary residences. You cannot use government assistance for second homes or investment properties.
Individual Development Accounts with Matching Funds
Individual Development Accounts (IDAs) are special savings programs where agencies match your contributions for homeownership. If you save $1,000, the agency might contribute $3,000 in matching funds.
These matching funds can be used for your home purchase, but there are restrictions. The maximum match ratio is 3-to-1. You must meet any vesting requirements in the IDA program before accessing the funds.
Some IDA matching funds are subject to "recapture" - meaning you might have to repay them if you sell the home within a certain timeframe. Your lender needs documentation of the recapture terms and your vested balance in the account.
Employer Assistance Programs
Some employers offer homeownership assistance as an employee benefit. This might be an unsecured loan with favorable terms or a forgivable loan that becomes a grant over time.
These employer loans are acceptable funding sources, but they must meet specific requirements outlined in Fannie Mae's employer-assisted housing guidelines [[5501.5]]. The key is that the loan terms don't create an undue financial burden that could affect your mortgage payments.
What Trips Up Borrowers
The biggest mistake is informal money transfers. Your brother can't just hand you $20,000 in cash. Every dollar must have a clear paper trail from the donor's bank account to yours or to the closing agent.
Another common problem is last-minute gifts. If money appears in your account during the loan process without proper documentation, it can delay your closing. Plan gift transfers early and keep all documentation organized.
Gift funds also cannot come from anyone with a financial interest in your transaction. Your real estate agent, loan officer, or seller cannot give you money, even if they call it a gift.
For second homes, remember the 5% personal contribution requirement when your loan exceeds 80% loan-to-value. You cannot use 100% gift funds in this situation.
Investment property purchases cannot use gift funds at all. Every dollar must come from your own resources or acceptable loan proceeds.
References
For the official guidelines, see 5501.4: Other sources of funds in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Freddie Mac Guideline Text
Sources of funds eligible to be used to qualify the Borrower other than those in
Section 5501.3
and the eligibility and documentation requirements are described in the tables below. These requirements apply to all funds used to qualify the Borrower, including reserves. Any limitations on the use of an asset type are specified in the tables.
Section 4501.7(c)(ii)
for other eligible sources of funds for Home Possible
®
Section 4504.7(c)(ii)
for other eligible sources of funds for HeritageOne
®
Mortgages.
This section contains requirements related to:
Gift or grant funds
Individual Development Account (IDA) – Agency matching funds subject to Recapture
Proceeds from an unsecured loan that is an Employer Assisted Homeownership (EAH) Benefit
(a)
Gift or grant funds
The following table contains eligibility and documentation requirements for gift or grant funds:
1.Gift funds or a gift of equity
Gift funds or a gift of equity are an eligible source of funds for a Mortgage secured by a Primary Residence or second home provided that funds do not have to be repaid and the donor is one of the following:
The estate of a Related Person
When a Mortgage is secured by a second home and the loan-to-value (LTV)/total LTV (TLTV)/Home Equity Line of Credit (HELOC) (HTLTV) ratio is greater than 80%, the gift is permitted only if the Borrower has made a Down Payment of at least 5% from Borrower personal funds as described in
Section 5501.3
.
Gift funds must be transferred directly from the donor’s account in a financial institution to the Borrower’s account or to the settlement or closing agent.
Exception:
For earnest money deposits, the donor may also provide the gift funds directly to a builder or real estate agent.
Note: Gift funds or gift of equity are not an eligible source of funds for Investment Property Mortgages.
Gift letter and evidence of receipt of the gift funds.
Gift letter must:
Be signed by the donor. When the gift is provided by a trust or an estate, the gift letter must be signed by the trustee or the authorized representative of the estate, as applicable.
State the donor’s name and that the funds are given by a Related Person, a trust established by a Related Person or the estate of a Related Person, as applicable
Include the donor’s mailing address and telephone number. When the donor is a trust or an estate, provide the mailing address and telephone number of the trustee or authorized representative, as applicable.
State the actual or the maximum amount of the gift funds or gift of equity
Establish that the gift funds or gift of equity are a gift that does not have to be repaid
Receipt of gift funds must be documented by one of the following:
Transfer of funds from the donor’s account in a financial institution to the Borrower’s account (e.g., copies of bank statements from both the donor and the Borrower’s accounts, a copy of a canceled gift check or a copy of a donor’s withdrawal slip and the Borrower’s deposit slip)
Transfer of the funds from the donor’s account in a financial institution to the settlement or closing agent (e.g., a copy of a cashier’s check or wire transfer confirmation)
For an
earnest money deposit
paid by the donor directly to the builder or real estate agent, transfer of funds from the donor’s account in a financial institution to the earnest money deposit holder (e.g., a copy of a canceled gift check, a copy of a cashier’s check or wire transfer confirmation)
Funds transferred using a
third-party money transfer application
or service are acceptable only when the documentation in the Mortgage file evidences that the funds were transferred using the application or service directly from the donor’s bank account to the Borrower’s bank account or to the settlement or closing agent
A
gift of equity
must be reflected on the Settlement/Closing Disclosure Statement
- Gift funds received as a wedding gift
Gift funds received as a wedding gift from unrelated persons and/or Related Persons are an eligible source of funds for a Mortgage secured by Primary Residence.
The gift funds must be on deposit in the Borrower’s depository account within 90 days of the date of the marriage license or certificate.
All of the following:
The marriage license or certificate
A verification of the gift funds in the Borrower’s depository account
- Gift funds received as a graduation gift
Gift funds received as a graduation gift from unrelated persons and/or Related Persons are an eligible source of funds for a Mortgage secured by a Primary Residence.
The gift funds must be on deposit in the Borrower’s depository account within 90 days of the date of graduation.
All of the following:
Evidence of graduation from an educational institution (e.g., diploma or transcripts) that supports the date of graduation
A verification of the gift funds in the Borrower’s depository account
- A gift or grant from an Agency
A gift or grant from an Agency that does not have to be repaid is an eligible source of funds provided that:
The gift or grant is given pursuant to an established program
The Agency is not an interested party (as described in
)
The funds were not obtained from an interested party either directly or through a third party; and
With respect to the subject Mortgage, the Agency must not:
Be the Seller or have participated in any aspect of the Mortgage origination process
Be affiliated with, under contract to or financed (directly or indirectly) by the Seller or any party that participated in the Mortgage origination process.
For these purposes, “affiliated with” means that the Agency and the Seller or other party are related to each other as a consequence of one entity directly or indirectly controlling the other party, being controlled by the other party or being under common control with that party.
Gifts and grants from Agencies are not eligible sources of funds for second home and Investment Property Mortgages.
Note: For special requirements for gifts or grants from Agencies for HeritageOne Mortgages, see
Section 4504.7(c)(ii)
.
Documentation supporting a gift or grant from an Agency. Examples of acceptable documentation include copies of grant program materials, award letters or terms and conditions provided to the Borrower.
The documentation must:
Establish that the funds were provided by an Agency
Establish that the organization has an established gift or grant program
Establish that the funds are a gift or grant that does not have to be repaid
Provide evidence that the funds were received by the Borrower or by the Seller on the Borrower’s behalf
(b)
IDA – Agency matching funds subject to Recapture
The following table contains eligibility and documentation requirements for IDA – Agency matching funds subject to Recapture:
IDA – Agency matching funds subject to Recapture
Documentation requirements
IDA – Agency matching funds subject to Recapture
Agency matching funds subject to Recapture are an eligible source of funds provided that:
The matching funds must be considered a gift or grant from an Agency as described in this table
A maximum of a 3-to-1 match by an Agency’s funds is permitted
The Borrower must satisfy any vesting requirements of the matching IDA program
Section 5501.3(a)
for information related to IDA – Agency matching funds not subject to Recapture.
Documentation of the IDA program verifying:
Ratio of matching funds by the Agency
Regular payments made by the Borrower and the matching organization
Vested balance or the percentage of vesting
Documentation of matching funds subject to a Recapture provision must also meet the requirements of this table for a gift or grant from an Agency, except that the Seller does not have to establish that the funds do not have to be repaid.
(c)
Proceeds from an unsecured loan that is an EAH Benefit
The following table contains eligibility and documentation requirements for proceeds from an unsecured loan that is an EAH Benefit:
Proceeds from an unsecured loan that is an EAH Benefit
Documentation requirements
Proceeds from an unsecured loan that is an EAH Benefit
Proceeds from an unsecured loan that is an EAH Benefit are an eligible source of funds provided that the eligibility requirements in
Section 5501.5
are met.
Section 5501.5
for EAH Benefit documentation requirements.
