Gift Funds, Gifts of Equity & Inheritance for a Down Payment in California

I’m Michael DiVita — DRE #01372066 | NMLS #241655, DiVita Home Finance (DRE #01818285 | NMLS #323700), Tiburon, CA. I’ve been in California mortgage lending since 2000 and founded DiVita Home Finance in 2007. I’m known as a creative mortgage broker: when a bank says no, I find the lender and the loan structure that can say yes. Call (800) 239-1103.

In California, 20% down on a typical home easily runs well into six figures, so help from family is one of the most common ways buyers close the gap. Every major loan program allows gift funds in some form — but each has its own rules on who can give, how much, and how it must be documented. This guide covers cash gifts, gifts of equity when you buy a home from family, and using an inheritance, updated for 2026 rules.

Who Can Give You a Down Payment Gift?

It depends on the loan type:

• Conventional (Fannie Mae): a relative — spouse, child or other dependent, or anyone related by blood, marriage, adoption, or legal guardianship — or a non-relative with a family-type relationship: a domestic partner, fiancé(e), former relative, or someone with a long-standing familial-like or mentorship relationship with you. (Fannie Mae broadened this list in 2026; lenders can apply their own overlays.)
• FHA: family members, your employer or labor union, a close friend with a clearly documented interest in you, a charitable organization, or a government agency or public entity with a homeownership assistance program.
• Never allowed: anyone with an interest in the sale — the seller (except a family gift of equity, below), builder, developer, or real estate agent.

Down payment assistance from agencies such as CalHFA is handled under its own program rules — see down payment assistance in California.

Gift Rules by Loan Type

Jumbo loans (above the 2026 conforming limit — $832,750 in most of California and up to $1,249,125 in high-cost counties such as Marin, San Francisco, and Los Angeles) are where gift rules vary most. Some lenders want a meaningful slice of the down payment from your own funds; others are flexible if reserves are strong. This is exactly where shopping several jumbo lenders pays off.

The Gift Letter: What It Must Say

Every gift needs a signed gift letter. Your lender will provide a template. Under Fannie Mae guidelines it must include:

• the actual (or maximum) dollar amount of the gift;
• the donor’s name, address, telephone number, and relationship to you; and
• the donor’s statement that no repayment is expected.

Many lenders also ask for the property address and the date of transfer. The “no repayment” statement is the heart of it: if there’s any expectation of repayment, it isn’t a gift — it’s a loan that has to be disclosed and may count in your debt-to-income ratio.

Documenting the Transfer

A gift letter alone isn’t enough; the lender has to see the money move. Acceptable evidence includes a copy of the donor’s check plus your deposit receipt, the donor’s withdrawal slip plus your deposit, an electronic transfer record, the donor’s check or wire sent directly to escrow, or the settlement statement showing escrow received the gift. Fannie Mae doesn’t automatically require the donor’s bank statements, but some lenders ask for them, and FHA can require proof of where the donor’s money came from — so ask your donor to keep their statements handy. Cash gifts are very hard to document; use a check or wire. (See large bank deposits for how underwriters review deposits.)

Timing: When to Transfer Gift Funds

There are two clean approaches. If the gift arrives well before you apply — early enough that it sits in your account for about two full statement cycles — it is generally treated as your own seasoned funds. If it arrives during the process, document it with a gift letter and transfer evidence, or have the donor wire it straight to escrow before closing. Either works; what causes delays is an undocumented deposit that turns up mid-underwriting. And whichever route you choose, it has to be a genuine gift — money you’re expected to repay must be disclosed.

Gift of Equity: Buying a Home From Family

A gift of equity is when a family member sells you their home for less than it’s worth and the difference counts toward your down payment. It’s one of the most useful ways California families pass on a home — I structure these regularly.

Example: Your parents’ Marin County home appraises at $1,000,000. They agree to give you $250,000 of equity. The contract shows the $1,000,000 price, and the settlement statement shows a $250,000 gift-of-equity credit. You borrow $750,000 — a 75% loan-to-value conforming loan in Marin — and bring only your closing costs.

• Conventional: allowed on primary residence and second-home purchases from an acceptable donor (same donor list as cash gifts). The same minimum-contribution rules apply, and a gift of equity cannot be counted as reserves. The lender keeps a signed gift letter and the settlement statement listing the gift of equity.
• FHA: only family members may give a gift of equity; it can cover the full 3.5% minimum.
• VA: no down payment is required, so a gift of equity mainly reduces the loan amount or covers costs; lender rules vary.

Tax and property-tax angles for the family: the gifted equity is a gift for federal tax purposes. In 2026 the annual exclusion is $19,000 per recipient; a larger gift generally just means the donor files IRS Form 709 and uses part of their lifetime exclusion ($15,000,000 per person in 2026). The seller’s capital gain and your tax basis are calculated differently in a part-sale, part-gift, so both sides should talk to a CPA. And if the home is going from parent to child (or grandparent to grandchild), California’s Proposition 19 parent-child exclusion may let you keep some of the existing property tax base if you make it your primary residence — check the rules before you set the price.

Using an Inheritance for Your Down Payment

An inheritance isn’t a gift — once it’s distributed to you, it’s simply your money, with no gift letter and no donor limits. How much paperwork you need depends on timing:

• Already distributed and seasoned: if the funds have been in your account across the statement period the lender reviews, your bank statements are usually enough.
• Recently received: document the source with the estate or trust distribution letter (or settlement statement if inherited property was sold) and the transfer into your account. Some lenders also ask for the will or trust and the death certificate.
• Still in probate or trust administration: lenders generally can’t count money you haven’t received. If distribution is close, it’s often better to wait. Some portfolio lenders will consider a documented pending distribution in limited ways, but that’s lender-specific.
• Ongoing trust distributions can count as qualifying income if documented and expected to continue for at least three years.

California has no state inheritance or estate tax, and the federal estate tax applies only to estates above $15,000,000 per person in 2026 — so most heirs owe no tax on the inheritance itself. Income earned on inherited assets, or gains when you sell inherited property or investments, can be taxable; confirm with a CPA. If you inherited a home rather than cash, see cash-out refinancing and mortgages and living trusts.

No Family Gift Available? Other Options

California has state and local assistance: CalHFA MyHome Assistance offers a deferred-payment junior loan of up to 3.5% of the price (FHA) or 3% (conventional); CalHFA Dream For All offers shared-appreciation help when funded; and many cities and counties run their own programs. A non-occupant co-borrower — often a parent — is another way family can help without giving cash.

Frequently Asked Questions

Can 100% of my down payment be a gift?

On a conventional loan for a one-unit primary residence, yes — at any loan-to-value. On FHA, yes. For a 2–4 unit primary residence or a second home with more than 20% down, gifts can cover everything; with less than 20% down you need 5% from your own funds. Gifts aren’t allowed on conventional investment property loans, and jumbo lenders set their own rules.

Can a friend give me money for a down payment?

On FHA, a close friend with a clearly documented interest in you is an acceptable donor. On conventional loans, Fannie Mae generally requires a relative or someone with a family-type relationship — though since 2026 that can include a person with a long-standing familial-like or mentorship relationship. Lenders may add their own restrictions.

Can gift funds be used for closing costs?

Yes. On conventional, FHA and VA loans, gifts can cover closing costs as well as the down payment, and the same gift letter and transfer documentation apply.

Do my parents owe gift tax if they help with my down payment?

Usually not. In 2026 a donor can give up to $19,000 per recipient without filing. Larger gifts generally require IRS Form 709, but tax is only owed after the donor’s lifetime exclusion ($15,000,000 per person in 2026) is used up. Talk to a CPA about your family’s situation.

What is a gift of equity?

It’s when a family member sells you their home below its value and the difference is credited as your down payment. Conventional loans allow it on primary and second homes from an acceptable donor, FHA allows it only from family members, and the lender documents it with a gift letter and the settlement statement.

Is an inheritance treated like a gift by mortgage lenders?

No. Once distributed to you, an inheritance is your own money — no gift letter is needed. If it arrived recently, you document the source with the estate or trust distribution paperwork and the transfer into your account. Money still in probate generally can’t be counted until it’s distributed.

Related Resources

• How Much Down Payment Do You Need in California?
• Down Payment Assistance in California
• First-Time Home Buyer Guide
• Non-Occupant Co-Borrowers
• Proposition 19 Property Tax Transfers
• Large Bank Deposit Flagged?
• California Closing Costs