Buying a house with a mortgage encumbers several technicalities. If you are not determined, you likely will give up or become frustrated with the process. That is why you should be armed with basic knowledge to sway through the tides. A lump gift money in your financial record without a convincing gift letter can disqualify your mortgage application. What is a mortgage gift letter, what is its usefulness in the mortgage application process, and how do I write one? This guide is a detailed overview of everything you need to know about gift letters. It also includes a mortgage gift letter template to help you write one with ease.
The National Association of Realtors’ 2023 Home Buyers and Sellers Generational Trends Report, states that approximately 10% of buyers used gift funds from friends or family for their down payments. The same report reads that 23% of homeowners aged 22 and 30, also bought their property using gift money. The number is set to increase in subsequent years too. Since mortgage providers demand a gift letter when you want to use gift money as part or all of your down payment, let’s know exactly what it is.
What Is a Gift Letter?
A gift letter is a legal document that expressly states that the money received as a present from a friend or relative is a gift. A gift simply means it is not refundable. It does not mean, you will get your donor to sign a gift letter for every monetary gift you receive, this letter is required when a borrower intends to pay part or all of his down payment with money receives as a gift. The letter must be signed by the donor and the receiver. Generally, the letter serves as proof that the money gift received will not be paid back in any way, shape, or form. That is the gift is not a loan
Leonard Ang the CEO of iProperty Management put it this way; “A gift letter is a statement written to your mortgage lender clarifying that the gift money deposited into your account is a gift and not a loan expected to be repaid from the person who gifted it to you,”
How Does a Mortgage Gift Letter Work?
Lenders mostly turn down borrowers who use borrowed money for a down payment on a home or other property. To curb this, you must submit gift letters. Money that has been “gifted” is non-refundable. The letter explicitly states that the money is a gift rather than a loan. For the letter to be valid, the gift-giver must write it himself. Also, it must state the relationship between the gift donor and the recipient.
Before the mortgage lender approves your gift letter, you must provide the giver’s account details too for record purposes. The letter must also state the purpose of the gift in question to be convincing gift is a sale, exchange, or other transfer of property from one person (the giver) to another person (the recipient) (the recipient). If the present is made to someone other than a spouse or a qualified charity, all gifts over a certain amount are subject to income taxes.
Why Do I Need a Gift Letter? It’s a Gift.
The truth is, you only need this letter because you want a loan. Before you will be approved for a mortgage loan, lenders want to be sure, that you will pay it back without difficulties. So they check your credit scores as well as your bank statement. You will have to give out your monthly income and all these will be assessed with scrutiny.
Some homeowners believe once you have a substantial enough down payment to match a lender’s requirements, securing a loan is easy. Unknown to them, lenders want to know that you’ll be able to repay your loan. Submitting your bank statement enables them to analyze your finance. So a lump sum with no subsequent flow in your account appears like a red flag. A lender may assume you borrowed the money just to impress them with a down payment. And using a loan to assess a loan put the lender at a greater risk. They would not just believe it is a gift unless you prove it.
Lenders utilize underwriting to assess your income and assets before approving a loan application. It helps them detect borrowers who do not have the financial capacity to repay a loan. Your lender will want bank account records, tax documents, and W-2s when you begin the underwriting process. These records show how much money you make and how much money you have in your bank account. Without a gift letter, your mortgage lender will likely turn down your application.
This explains why you need a gift letter, to convince your mortgage lender the money you receive is a gift and not a loan.
What to Include in a Mortgage Gift Letter
The following must be included in a mortgage gift letter
- The donor’s full name, address, phone number, and email address, as well as the recipient’s full name, address, phone number, and email address
- The address of the house you’re buying
- Relationship between the donor and the recipient of the gift
- The gift monies’ monetary value
- When were the monies deposited or transferred?
- The name of the financial institution or bank where the money was transferred from as well as where it was deposited
- An indication of how the donated cash will be put to good use.
- The statement of the donor that the monies do not need to be repaid
- Both the giver and the recipient’s signatures are required.
Having copies of the donor’s and borrower’s bank statements that reflect the gift fund transaction is an advantage. Most often, this is included in a gift letter from your lender, but it helps record the transaction.
Regulations for Gift Letters Based on Loan Type
Depending on the type of loan you acquire, the amount of money you can take as a gift for your down payment varies. Here’s a rundown of how a loan type affects your money gift.
#1. Conventional Loan
Fannie Mae and Freddie Mac’s, as well as FHA conventional loans, only enable you to borrow money from family members as a down payment.
When it comes to conventional loans, it is best to transfer money the gift is to wire the funds to the title company and receive a copy of the wire receipt to match up with the gift letter. “Conventional loans are the least cumbersome.” Sending it to the buyer directly, the lender will demand a copy of the check, transfer, or wire document matching the donor’s name. Furthermore, conventional loans hardly demand the donor’s bank statement. It is mostly when the wire transfer receipt does not identify the donor, that an underwriter may request a bank statement or other verification.
Family members in the context of obtaining a mortgage include:
- Your partner
- Paternal grandparents
- Your great-grandparents or grandparents
- Your uncles and aunts
- Uncles and cousins
- Your nephews and nieces
- Your parents-in-law
- SIblings
- Your brothers and sisters
- Your fiancé or fiancée’s fiancée’s fiancée’s fiance
#2. Federal Housing Administration Loans (FHA)
The FHA loans are similar to conventional loans. FHA loans allow practically all of your family members to contribute to your down payment.
Fha Money Gifts Can Come From
- Close friends
- Family
- Your company’s boss
- Your trade union
- A philanthropic organization that helps people financially.
- A government organization or public entity that assists first-time house purchasers in purchasing a home.
#3. USDA Loans and VA Loans
When it comes to USDA and VA loans, there is usually no restriction on down payment. USDA loans assist borrowers in rural areas in achieving their dream of owning a home. Even though the downpayment has no rule, you must not receive gift funds from any party with interest in the property. Interested parties include the seller, the builder, the developer, or a real estate agent.
Gift Letters Regulations Based on Property Type
The amount of gift money you can utilize for a down payment has no boundaries. You may, however, be required to contribute at least a portion of your funds to your down payment. It is dependent on the type of property you have. Let’s have a look at the distinctions. How you use your gift monies depends on the sort of property you’re closing on. A few instances of different property kinds and how monetary donations can affect your mortgage down payment are shown below.
#1. Primary Residences
If your ideal house is a single-family house, gift money is perfect as a down payment. You do not necessarily need to add your money to your gift for the downpayment. Gift money might be used to purchase a primary residence.
Rules for a Primary Residence
When your money gift is up to 20% of the loan, you do not need to add your money when buying a single house.
If you want a multi-family property, you don’t have to spend any of your own money as long as your down payment is at least 20% of the loan amount. If your down payment is less than 20%, you must put down 5% of your own money.
#2. Second Residence
When it comes to second homes, you cannot purchase them with FHA, USDA, or VA loans.
Rules for Second Residence
The guidelines for making a down payment on a second property are the same as they are for your primary house. If your money gift is up to 20% of the loan, you do not have to add your money. However, if it is less than that, you will have to add at least % of your money to your down payment.
#3. Investment Properties
When it comes to investment properties in real estate, mortgage provider does not permit a down payment with gift funds.
Gift Letters And Mortgage Taxes
When it comes to paying taxes on gift money, the donor pays the taxes. In the USA, everyone has a lifetime gift exemption of $12.06 million on tax. This means if you will ever pass more than that to another person in your lifetime, they will be subject to tax payment. Also, there is another law on gifting. Generally, any gift of $15,000 or below does not require tax payment on them. But when your gift is above this amount, you will have to pay taxes. If a donor decides not to pay taxes on the gift, he can claim his lifetime gift exemption by filing a gift tax return.
Gift Tax Return
A gift tax return tells the government how much money they’ve given to someone. In reality, the donor claimed his lifetime gift exemption.
How Does It Work?
Let’s assume Mr. Myles gifted his nephew a wedding gift of $30,000. If he decides not to pay tax on the $30,000, the tax on the gift amount will be deducted from his $12.06 million lifetime gift exemption.
Who Writes a Gift Letter?
The gift letter is written by the donor who is giving a gift to another person. We will include a template to show you how to write a convincing mortgage gift letter. However, there are mortgage providers that demand your gift letter must be in their template. If this is your case, then you will have to ask your lender to give you a template to write your gift letter.
Do’s of a Mortgage Gift Letter
The following are the dos of a gift letter.
- Obtain a signed declaration from the person who gave you the gift.
- Remind the gift giver to preserve a record of the transaction.
- Get the money ahead of time and understand how experienced money works.
- Be aware of the monetary limit for gift funds in terms of taxation.
Don’t of a Gift Letter
- When it’s a loan, tell the lender the money is a gift.
- Without justification, change or add money
- Assume that all loan types accept gifts as a down payment.
- Ignore the mortgage loan because you don’t have any money to play with.
Mortgage Gift Letters and Perfect Timing Tips
Generally, lenders demand a 60 days financial record from borrowers. Not to worry, they only want to be sure, that the money in your account has been there all along and that you did not borrow for your down payment. With this handy information, you can easily bypass a gift letter, because the lender will assume it was your money all along.
How Does This Help?
If you have a large financial gift that you wish to put toward a down payment, you should wait until the 60-day deadline has passed before applying for a mortgage.
Gift Letter Mortgage Template
As promised, we will be giving you a gift letter mortgage template in picture format. Kindly remember some mortgage lenders frequently demand their gift letter must be in their template. You’d have to request the template from your mortgage provider in that situation.
Gift Letter
I/We do hereby certify the following:
I/We (Donor) have given a gift of $20,000 to the below Borrower(s). No repayment of this gift is expected or implied either in the form of cash or future services of the recipient.
Homebuyer’s name
This gift is to be applied toward the purchase of the below property:
Property address and location
Relationship to Borrower: Mother
Donor’s name: Mother Homebuyer
Street address: 23232 Woodhaven St
City: Omaha State: NE Zip: 68186
Donor Telephone: 402-555-1234
The source of gift funds is:
Bank Name: Western Savings Bank
Type of Account: [ ] Checking [x ] Savings [ ] Other
Account No.: 12345678
_________________________________ ____________________
Donor Signature Date
_________________________________ ____________________
Borrower Signature (Recipient) Date
_________________________________ ____________________
Borrower Signature (Recipient) Date
Upon the signature(s) of this gift letter, I/We hereby certify that any funds given to the homebuyer were not from any person or entity with an interest in the sale of the property including the seller, or loan officer, real estate agent, broker, builder, or any other entity associated with this transaction.
Is the gift letter the down payment?
A gift letter for a mortgage is a formal declaration that money provided to a borrower as a down payment are gifts, not loans that must be repaid.
What is a gift letter Canada?
In Canada, you can get your down payment from a close family, and a “gift letter” serves as proof. Everyone engaged in trying to arrange your mortgage will lose time, effort, and patience due to a badly drafted gift letter.
Why do lenders want a gift letter?
The down payment you utilize must be your own money, not a secret loan, for lenders to approve your mortgage application. The individual who gives you money must provide you with a gift letter.
Do lenders verify gift letters?
Yes, a gift letter is a requirement from every lender. Even though you may have the money, the lender requires proof that you won’t be expected to pay back the gift. In addition, the lender must make sure that the cash came from an authorized source.
What is needed for a gift letter?
Name, contact information for the donor, and address. Relationship between the client and the donor. the amount of the donation in money. the day that the money was transferred.
Are gift letters legally binding?
A gift letter is a formal, legally-binding statement that a significant donation was made to you by the donor. It formally acknowledges that the funds are not a loan that must be repaid but rather a gift.
Conclusion
Getting a mortgage loan may appear a bit tricky but it is no big deal if you understand how it works. If you receive a monetary gift you’d like to use as part of your mortgage down payment, getting a gift letter will increase your chance of qualifying for the loan. By being patient and disciplined enough to leave the money for 60 days, you can completely avoid getting a gift letter. If you also decide to use a gift letter, do not fail to get a template from your mortgage provider.
FAQs On Gift Letter
What Are The Gift Limits?
There are no restrictions on how much someone can offer you for a down payment or closing costs on a mortgage. So long as they are willing to take care of the tax. You may, however, be asked to provide a portion of the down payment from your finances, depending on the loan and property type.
Is my gift taxable?
Yes, money gifts are taxable. As of 2023, any money gift above $16,000 for an individual and $32,000 fr a couple is subject to tax. However, the donor of the gift is responsible not you.
Why do I need a gift letter?
Gift letters are needful because it gives the mortgagee proof that you did not borrow for your down payment.
