Evergreen: Refinance with gift funds or grants

Refinancing with Gift Funds or Grants: An Evergreen Guide for U.S. Homeowners

Refinancing can lower your monthly payment, shorten your loan term, or let you take cash out of your home equity. Sometimes borrowers don’t have enough liquid funds to cover closing costs, prepaids, or required reserves—and consider using gift funds or grant programs. This guide explains what gift funds and grants are, when lenders allow them in refinance transactions, how to document them, common restrictions, and practical steps to follow.

Key terms

• Gift funds: Money given to the borrower by another person (often a family member) that does not need to be repaid.
• Grants: Financial assistance from a government agency, nonprofit, or other organization. Grants may be restricted to certain uses (for example, closing costs or principal reduction).
• Refinance types: Rate-and-term refinance (change rate/term), cash-out refinance (take equity as cash), streamline or no-cash-out refinances (program-specific, e.g., FHA streamline).

Can you use gift funds or grants to refinance?

Short answer: sometimes. Whether gift funds or grants can be used on a refinance depends on the loan program (conventional, FHA, VA, USDA), the specific product, and the lender’s overlays. Gift funds are commonly accepted for closing costs on many refinance types, but rules vary for using gifts to meet reserve or qualification requirements. Grants can be acceptable if the program explicitly allows refinance uses.

How lenders typically treat gift funds and grants

• Source and documentation: Lenders require paper trails—bank statements showing the donor’s funds, a signed gift letter, and a clear transfer into the borrower’s account.
• No repayment: For gift funds to be acceptable, the lender must be satisfied the funds are a true gift, not a loan. If donors expect repayment, the funds may be treated as debt and affect qualification.
• Program differences: Some loan programs have more permissive rules (e.g., FHA often allows gifts for many purposes), while others have limits or do not allow grants intended only for purchase transactions.
• Lender overlays: Even when guidelines permit gifts or grants, individual lenders may impose stricter documentation or prohibit certain sources.

Program-level considerations

Conventional loans (Fannie Mae / Freddie Mac)

Conventional refinances commonly allow gift funds for closing costs and prepaids. For rate-and-term refinances, the borrower rarely needs a down payment, but may need cash to close; gifts can often cover those costs if properly documented. Freddie/Fannie eligibility for gifts can be nuanced—confirm with your lender.

FHA

FHA programs generally permit gift funds for closing costs on refinance transactions and for borrower funds required in certain scenarios. FHA streamline refinances may have different documentation requirements and often do not require evidence of assets beyond the mortgage payment source, but program specifics vary.

VA

VA refinances commonly do not require a minimum borrower investment, and gift funds may be used for closing costs in many cases. However, the VA and lenders have rules about acceptable sources and documentation.

USDA

USDA refinance programs have their own rules about gifts and third-party assistance. Grants intended for purchase transactions from certain down payment assistance programs may not be usable for refinance—confirm program rules.

Grants and assistance programs

“Grant” is a broad term. There are state, local, and nonprofit programs that provide assistance for homeowners. Some programs focus on purchases (down payment assistance) and explicitly exclude refinance. Other programs target affordability or principal reduction and may allow refinancing help. Always read the grant terms or contact the program administrator to confirm whether refinancing is an eligible use.

Documentation required

Lenders will want a clear paper trail. Common documentation includes:

• Signed and dated gift letter identifying donor, recipient, relationship, amount, and statement that the funds are a true gift with no expectation of repayment.
• Donor bank statements showing sufficient funds for the gift and source of the money if requested.
• Evidence of transfer (canceled checks, electronic transfer receipts, deposit records) into the borrower’s account.
• If a grant, a copy of the grant award letter or contract specifying allowable uses and disbursement method.
• Any required tax or legal paperwork if the donor’s situation triggers reporting requirements (discussed below).

Step-by-step: How to refinance using gift funds or a grant

1. Clarify your refinance goal: Are you lowering your rate, shortening your term, or doing a cash-out? The purpose affects which programs and documentation apply.
2. Talk to your current lender and potential lenders: Ask whether they accept gift funds or specific grants for the refinance product you want. Ask about overlays and exact documentation required.
3. Confirm grant program eligibility: If pursuing a grant, confirm whether the grant allows refinance use and whether any timing or disbursement requirements apply.
4. Identify an acceptable donor: If using gift funds, ensure the intended donor is acceptable under the lender’s rules (often family members or qualified organizations). Discuss expectations—gifts must not be loans.
5. Gather documentation up front: Obtain gift letters, donor bank records, award letters, and transfer evidence. Getting docs ready early speeds underwriting.
6. Make the transfer and document it: Donor should make a direct transfer so deposits are easily traceable. Save and provide receipts and bank records to the lender.
7. Disclose everything: Be transparent with the lender about the source and use of funds. Undisclosed or improperly documented funds can delay or derail closing.
8. Close and follow grant terms: If a grant is disbursed in stages or requires post-closing reporting, follow the program’s instructions to remain in compliance.

Common restrictions and red flags

• Borrower repayment expectation: If the donor expects repayment or liens are placed as security, the gift may be treated as debt for qualifying purposes.
• Ineligible grant uses: Many down payment assistance programs are purchase-only and cannot be used on refinances.
• Insufficient documentation: Cash deposits without a documented source, or missing gift letters, often delay underwriting or cause denial.
• Recent large deposits: Funds that appear in the borrower’s account shortly before closing must be documented to show permissible origin.
• Lender overlays: Even if program rules allow gifts, some lenders impose tighter rules—ask early.

Tax and legal considerations

Gifts can have tax implications for the donor. In the U.S., large gifts may require the donor to file a gift tax return and could use part of their lifetime exemption. The recipient (borrower) generally does not pay federal income tax on a gift, but you should consult a tax professional for personal advice. Grants may have program-specific reporting requirements and eligibility conditions; read the grant agreement carefully.

Alternatives to gifts or grants

• Shop lenders for low or no-cost refinance options—some lenders offer credits toward closing costs in exchange for slightly higher rates.
• Roll closing costs into the loan amount if the property equity and program permit.
• Negotiate lender credits, or look for lender promotions for existing customers.
• Consider timing the refinance until you have saved sufficient funds to avoid gifts or complex documentation.

Practical tips

• Start the conversation early with your lender about gift/grant plans—requirements differ and can affect approval timing.
• Get written confirmation from the grant provider or lender that the funds are acceptable for your refinance.
• Avoid informal cash transfers; electronic transfers with clear records are best.
• Keep all original gift letters and bank documents; underwriters may request additional proof mid-process.
• Maintain a conservative timeline—documenting gifts and coordinating grants can add time to the refinance process.

Brief FAQ

Can I use a gift from a relative to pay refinance closing costs?

Often yes, but confirm with your lender and program. You’ll usually need a signed gift letter and bank records showing the donor had the funds and transferred them to you.

Can grants be used for refinance?

Some grants allow refinance-related uses, but many are intended only for purchase transactions. Verify the program’s terms before applying or expecting use for refinance.

Will a gift affect my loan approval?

A properly documented gift should not harm approval, but if it’s undocumented, treated as a loan, or creates unexplained assets, it can affect qualification. Transparency and documentation are key.

Do I need to pay taxes on a gift I receive?

Recipients generally don’t pay federal income tax on gifts. The donor may have filing obligations depending on the amount. Consult a tax professional for specific advice.

Can a friend give me a gift for refinance?

Lenders typically prefer gifts from family or certain approved sources. Some may accept gifts from close friends if the relationship and source are documented—ask your lender.

Final thoughts

Using gift funds or grants to refinance is possible in many circumstances, but the rules vary by loan program and lender. The most important steps are to confirm acceptability before you proceed, document everything carefully, and consult professionals (lender, tax advisor, grant administrator) when in doubt. Early planning and clear communication with your lender will minimize surprises and help the refinance proceed smoothly.