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.<\/p>
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.<\/p>
A mortgage gift letter is a signed letter from a donor verifying that their down payment gift money is not subject to repayment.<\/p>
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.<\/p>
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.<\/p>
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.<\/p>
For qualification purposes, Rocket Mortgage\u00ae 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.<\/p>
So, which deposits must you worry about receiving a gift letter for during those 60 days? Let’s go over a hypothetical situation.<\/p>
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?<\/p>
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.<\/p>
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.<\/p>
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.<\/p>
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.<\/p>
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.<\/p>
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.<\/p>
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.<\/p>
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:<\/p>
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.<\/p>
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.<\/p>
According to FHA criteria, you may also receive gift money from:<\/p>
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:<\/p>
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.<\/p>
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.<\/p>
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.<\/p>
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%.<\/p>
Gift cash cannot be used to make a down payment on an investment property.<\/p>
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.<\/p>
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.<\/p>
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.<\/p>
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.<\/p>
Also, remember that tax laws change regularly. Speak with a tax professional to ensure you grasp the current laws.<\/p>
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.<\/p>
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.<\/p>
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.<\/p>
A mortgage gift letter must include the following information:<\/p>
You can send paperwork to your lender once the gift letter is completed. Notaries are optional.<\/p>