When someone lends you money for a down payment on a house, your lender will require a gift letter for a mortgage, as well as paperwork proving the money exchange. A gift letter is a statement from a donor (typically a relative or friend) explaining why money is being given without the expectation of repayment.
Knowing how to write a gift letter for a down payment on a mortgage will help you avoid blunders that could delay or ruin your loan approval. We also have a mortgage gift letter template here that will help you when you want to write a gift letter.
What is a Gift Letter?
A mortgage down payment gift letter is a formal statement that the funds are a gift rather than a loan that must be returned. The letter must identify who is gifting the money and where the donor’s finances are coming from, as well as explain the donor’s and recipient’s relationship.
What Is a Mortgage Gift Letter?
A mortgage gift letter is a signed letter from a donor verifying that their down payment gift money is not subject to repayment.
Money gifts from friends and family are a frequent approach to assist with home-buying expenses such as the down payment and closing charges. Lenders want to make sure this money isn’t a loan because having more debt can impair your mortgage approval.
The mortgage gift letter is a simple approach to reassure your lender that you are not obligated to repay friends and family for their gift monies.
What Effect Do Gift Letters Have on Mortgage Underwriting?
Assume you’ve recently married and received a sizable down payment gift. Although you may be eager to get your money in the bank, you don’t want these deposits to cause complications when you apply for a mortgage. Let’s go through some more specifics on how to gift money influences mortgage underwriting.
#1. The Mortgage Gift Letter’s Timing
For qualification purposes, Rocket Mortgage® requires a 60-day history of your assets. Your mortgage provider can take it from there if you have a proof for the last 60 days.
#2. Amount of Mortgage Gift
So, which deposits must you worry about receiving a gift letter for during those 60 days? Let’s go over a hypothetical situation.
You recently married. Aunt Sue gave you $75, but Grandma Betty gave you $10,000 for your wedding. Will gift letters be required for both deposits?
In general, any big deposit must be verified by your underwriter. What are the requirements for a “big deposit”? It is any single deposit that surpasses 50% of the total monthly qualifying income for conventional, Department of Veterans Affairs (VA), and jumbo loans.
A “big deposit” is defined as any deposit that is greater than 1% of the home’s adjusted purchase price or appraised value, whichever is smaller, for the Federal Housing Administration (FHA) and the United States Department of Agriculture (USDA) loans.
Assume you get a standard loan in this case. If you earn $4,000 per month, any deposit over $2,000 will almost certainly be questioned by your underwriter. As a result, the underwriter will almost certainly want to confirm that Grandma Betty’s $10,000 gift is a gift rather than a loan, therefore you’ll need to ask her for a gift letter. Aunt Sue’s gift, on the other hand, is little enough that the underwriter might overlook it.
Of course, this is partially at the discretion of the underwriter. If you make any deposits that appear unusual, your underwriter may scrutinize them regardless of your income. They would want to verify that regardless of the purchase price/appraised value or qualifying income if you regularly had $2,000 in your checking account and suddenly have a deposit for an extra $8,000 in your checking account.
What Are the Gift Restrictions?
There are no restrictions on how much someone can offer you for a mortgage down payment or closing costs. However, depending on the loan and the type of property, you may be required to provide a portion of the down payment from your finances.
Remember that these restrictions are subject to change due to lending regulations, so check with your mortgage firm for the most up-to-date information.
Regulations for Mortgage Gift Letters Based on Loan Type
The amount of money you can take as a gift for your down payment depends on the type of loan you obtain. Let’s look at how the type of loan you have can affect your gift money.
#1. Traditional Loan
Conventional loans held by Fannie Mae and Freddie Mac only enable you to use gift money from family members. Family members in the context of obtaining a mortgage include:
- Your partner
- Your guardians (biological, adoptive, step- and foster parents all qualify)
- Your great-grandparents or grandparents
- Your uncles and aunts (including step-relatives)
- Your relatives (including step-relatives and adoptive relatives)
- Your nephews and nieces (including step-relatives)
- Your parents’ in-laws (including parents, grandparents, aunts, uncles, brothers-in-law, sisters-in-law, and future in-laws)
- Your youngsters (biological, adoptive, step- and foster children all qualify)
- Your brothers and sisters (including step-relatives, foster, and adoptive siblings)
- Your spouse at home
- Your fiancé/fiancée
#2. FHA Mortgages
FHA loans, like conventional loans, allow practically all of your family members to contribute to your down payment. The only distinction is that you cannot use gift cash from relatives, nieces, or nephews under typical FHA guidelines.
However, a gift letter from close friends who demonstrate a genuine interest in your life is permitted under FHA criteria. This can include close family members (such as cousins, nieces, and nephews), close friends, and even ex-spouses.
According to FHA criteria, you may also receive gift money from:
- Your supervisor
- Your trade union
- A philanthropic organization that offers financial aid
- A government organization or public entity that assists first-time house purchasers in purchasing a home.
- USDA Loans and VA Loans
Down payment gifts are not subject to numerous restrictions with USDA and VA loans. Almost anyone can offer you gift monies to put toward a USDA or VA loan when you buy a home. The only exclusions are those with a vested interest in the transaction, such as:
- The person who is selling the house you are purchasing
- The individual or firm who built the house you’re considering purchasing.
- The builder of the house you’re considering purchasing
- Your realtor or the seller’s realtor
Regulations for Mortgage Gift Letter Based on Property Type
There are no restrictions on how much gift money you can utilize as a down payment. However, you may be required to invest at least a portion of your own money in your down payment. It is determined by the type of property. Let us examine the distinctions.
#1. Primary Places of Residence
Gift money may be used to purchase a principal residence. So, if you’re purchasing a single-family home, you don’t have to spend any of your own money to cover the down payment.
If you’re buying 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 contribute 5% of your own money to it.
#2. Secondary dwellings
The rules for a second home down payment are the same as for primary residence down payments. If you have a down payment of at least 20%, all of your money can come from a gift, but at least 5% of your down payment must come from your finances if you have a down payment of less than 20%.
#3. Properties for Investment
Gift cash cannot be used to make a down payment on an investment property.
Mortgage Gift Letter Logistics: Taxes, Time, and Template
How do you maximize your chances of securing a loan now that you’ve decided to use a gift for your down payment? Let’s look at the tax ramifications of getting a down payment as a gift and how you might reduce your risk.
Taxes And Mortgage Gift Letter
Because you are the one receiving the gift, you are usually not required to pay any taxes on the money you receive. However, the person who gave you the gift may be required to do so. Inform them about gift tax regulations so they can be ready for the next tax season.
For 2021, the yearly gift exclusion is $15,000, which means your donor does not need to declare anything if they give you less than that amount. If they give you more than that amount, they must file a gift tax return.
A gift tax return informs the government of the amount given to you. So, filing a gift tax return does not obligate the giver to pay anything. It simply subtracts the present gift from their lifetime gift tax exclusion, which limits how much a person can contribute throughout his or her life.
Also, remember that tax laws change regularly. Speak with a tax professional to ensure you grasp the current laws.
Strategically time your gift money deposit
You can save time when applying for a mortgage by timing your deposit right. When your funds have been in your account for at least 60 days, most lenders consider them secure.
If you have a large financial gift that you wish to utilize for a down payment, you should wait until the 60-day deadline has passed before applying for a mortgage. Your mortgage company will be less skeptical of the funds in your account as a result.
How Do You Write a Mortgage Gift Letter?
To write a mortgage gift letter, you must include the donor’s name and contact information, the amount of the gift, and other information about the home and gift. The donor writes and signs it, although your mortgage lender may have a template you can use.
A mortgage gift letter must include the following information:
- Name and contact information for the donor
- Address of the purchased property
- Relationship between donor and buyer
- Amount of the gift
- The date of the gift transfer
- A statement from the donor stating that repayment is not anticipated.
- Donor’s bank, account number, and account type
- Signature of the Donor
You can send paperwork to your lender once the gift letter is completed. Notaries are optional.
Read Also: HOW TO WRITE A SIMPLE WILL: Detailed Step By Step Guide
Mortgage Gift Letter template
If your lender does not provide a mortgage gift letter template, you can write one yourself. To write your gift letter you can copy and edit the following mortgage gift letter template:
| To: [Name/Address of Lender] I/We, [DONOR NAMES], certify our gift of $[GIFT AMOUNT] to [BUYER] is given without any expectation of repayment, implied or otherwise. Our gift of $[GIFT AMOUNT] is to be applied toward the purchase of [HOUSE ADDRESS] | |
Money Given By:Name: [DONOR NAME] Relationship To Buyer: [RELATIONSHIP] Phone: [PHONE NUMBER] Address: [DONOR ADDRESS] | Money Received By:Name: [BUYER NAME]Phone: [PHONE NUMBER]Address: [DONOR ADDRESS] |
| Source of Gift Funds: Bank: [BANK NAME] Account Type: [CHECKING/SAVINGS] Account Number: [ACCOUNT NUMBER] Deposited: [DATE DEPOSITED] Buyer’s Signature: _______________________________ Date: __________ Donor’s Signature: _______________________________ Date: __________ *Upon signing this gift letter, we certify that funds given to the home buyer were not made available by any persons or entities with interests in the sale of the above property, including the seller, real estate agent, lender, or other parties involved in the transaction. |
When creating your home-buying timeline, request that contributors deliver a mortgage gift letter once your offer is approved and before you close on the house.
You can deliver the letter to your lender for documentation once all parties have signed it.
Mortgage Gift Letter Sorted by Loan Type
Mortgage gift requirements vary according to the type of mortgage loan utilized to purchase a house. Depending on who provides the money, all single-family, main house purchasers can apply gift monies to a down payment.
Mortgage Gifts and Conventional Loans
Conventional loans are the most prevalent financing option for first-time buyers and require that gift money contributors be related to the buyer.
The following family members can donate gift funds:
- The buyer’s wife
- Dependents or children
- relatives by blood
- Legal cousins (for example, relatives by marriage, adoption, or legal guardianship)
- Domestic partners or fiancees
Friends and other third parties are unable to contribute to conventional loan mortgage gifts.
Mortgage Gifts and FHA Loans
FHA loans enable more than simply family and friends to contribute funds. Donors could include:
- Close relatives
- Close associates
- Employers
- Trade unions
- Charitable institutions
Extended family members, such as cousins, nieces, and nephews, are not permitted to contribute to FHA loan down payments.
USDA and VA Loans, and Mortgage Gifts
USDA and VA loans are the most accommodating when it comes to down payment gifts. These loans have no limits depending on the buyer’s relationship.
Donors, on the other hand, cannot have a stake in the property’s sale. The seller, real estate agents, lender, and anyone involved in the transaction are examples of prohibited donors.
Because USDA and VA loans both provide 100 percent mortgage financing, you can use mortgage gifts for closing expenses instead of a down payment.
How Can You Prove Mortgage Gift Money?
You must produce a gift letter to show that donation money is not loan. Documentation of the gift’s deposit into your bank account may be required. Ask the giver for a check or bank statement.
Why Do Mortgage Companies Require Gift Letters?
A gift letter informs the lender that the money will not be repaid and will not burden the recipient. If the provided money is a loan, mortgage fraud may occur.
Can Someone Gift You a Mortgage?
Mortgage lenders usually won’t accept cash gifts from anyone. Parents, grandparents, and siblings frequently provide the funds. If you’re engaged, your husband, domestic partner, or significant other can give you gifts too.
What Documentation Is Needed to Gift Money?
Gift letters must be signed by donors. The gift letter must indicate the donation’s real or maximum value and the donor’s assertion that no repayment is intended.
Mortgage Gift Letter FAQs
Does a mortgage gift letter get reported to the IRS?
According to the IRS gift tax exclusions for 2023, any down payment gift of less than $16,000 is exempt from reporting. The funds over that amount must be declared on the donor’s gift tax return.
What is the point of a gift letter mortgage?
A gift letter tells your lender that the sudden inflow of funds into your account is a gift, not a loan. Your lender may also request withdrawal slips from the transaction from your donor.
Do all lenders require a gift letter?
Yes, a gift letter is required by all lenders. Even if you have the funds, the lender must certify that you will not be required to repay the gift. Furthermore, the lender must check that the money was obtained legally.
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