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- Gift letters are required by mortgage lenders as documentation to prove that the funds received are a gift, not a loan, and that the donor is not involved in the home purchase.
- Different loan types have different guidelines for down payment gifts, and the rules vary by property type.
- If the gift exceeds the IRS’s annual gift tax exemption, the giver may need to file a gift tax return.
Homebuyers often turn to family and friends for help with the hefty down payment required to purchase a home. A gift letter for a mortgage is a document that validates the source of a homebuyer’s down payment funds, often used when the funds are gifted from a family member or friend. This document is essential to the mortgage underwriting process, as mortgage lenders must verify the legitimacy of the gift funds.
Here’s how a gift letter for a mortgage works and who is eligible to gift money for a mortgage down payment.
What is a gift letter for a mortgage down payment?
A gift letter is a document that helps satisfy the requirement that a borrower’s down payment funds come from legitimate sources. The mortgage lender needs to know that the funds came from someone with a relationship to the homebuyer, and that the money isn’t coming from somewhere illegal.
Through a gift letter, the giver verifies in writing not only that he or she actually gave the gift, but also that he or she had the financial means to give it by providing bank statements as proof. This is especially important for FHA loans.
The giver also verifies that the funds won’t ever have to be paid back by the recipient. If the recipient were to have to pay the gift back, the lender would have to calculate that in terms of repayment to see if the homebuyer would still qualify for the loan.
At minimum, a gift letter should include:
- Who the giver is and their relationship to the recipient
- Evidence of the giver’s ability to gift the money
- Where the gift is sourced from
- The amount of the gift
- What the gift is to be used for
- The address of the house the recipient is purchasing (if an offer is already on the table)
To protect both parties, it’s also wise to include that there’s no expectation of repayment, either by paying back the gifted funds or by performing a service, and that the giver will not place a lien on or otherwise make a claim to the property, even though they contributed to the purchase of it.
Who can gift money for a mortgage down payment?
Most loan programs allow gift money from family members, including parents, grandparents and siblings, as well as spouses, domestic partners and significant others. Some loan programs, however, may also permit gifts from friends.
Fannie Mae and Freddie Mac loans specifically require the gift to come from a family member or domestic partner. FHA, USDA and VA loans have similar requirements but also allow gift money from close friends, charitable organizations, government assistance programs and the borrower’s employer. In all instances, the giver must not be a financially interested party, such as the real estate agent or the seller.
Down payment gifts in the underwriting process
Borrowers can use gift money for a down payment, but lenders must verify the source of the funds, especially if it is a large amount. Mortgage lenders need assurance that borrowers have the means to repay their loans. If a large gift is intended for the down payment, a gift letter can be written to confirm that the funds are a gift. Different loan types have different guidelines for down payment gifts.
Underwriters carefully review bank statements for the past two months, paying attention to large deposits exceeding 50 percent of monthly qualifying income. Funds used for the mortgage must be traced and held in the borrower’s account for a certain period of time. Financial assistance from parties with a vested interest in the transaction, such as the real estate agent, is not allowed. Failure to verify the sources of the funds or if they are deemed unacceptable (for example, money laundering or fraud) could result in the lender denying the loan.
How to use gift money for a down payment
If you receive gift money that exceeds half of your monthly household income, you’ll likely need to show your lender a gift letter. Any gift deposits less than that amount will not need a gift letter. You can use gift money for your entire down payment or just a part of it, but the exact breakdown of funds will depend on your loan and property type.
If your down payment will be made with a gift, you should expect the lender to request the following documentation:
- A gift letter signed by you and the giver of the gift money
- Bank statements from the giver
- Other proof of funds, if needed
Depending on the loan type and down payment amount, you may be required to provide additional documentation to show where the gift funds came from and ensure that the giver is an acceptable source. For example, the FHA and conventional loans have different definitions of a “large deposit” and may require additional documentation.
Mortgage gift letter rules by loan type
The rules vary by loan program:
- Fannie Mae and Freddie Mac conventional loans: If you’re buying a single-family home, your entire down payment can come from a gift. The funds can come from a relative or a nonrelative that has a familial relationship to you, such as a domestic partner or a godparent. Freddie Mac also allows borrowers to use wedding gifts and graduation gifts, so long as you provide a copy of your marriage license or your diploma, respectively.
- FHA loans: The Federal Housing Administration (FHA) backs mortgages with a minimum down payment of 3.5 percent. The full amount can be gifted, but the FHA requires a gift letter and supporting documents similar to those for Fannie and Freddie loans.
- VA loans: The U.S. Department of Veterans Affairs (VA) guarantees home loans for eligible military borrowers. VA loans require no down payment, but VA guidelines allow borrowers to put gift funds toward closing costs or a down payment. The documentation rules are similar to those of FHA and conventional loans.
- USDA loans: The U.S. Department of Agriculture (USDA) guarantees no-down-payment mortgages to borrowers with low to moderate income in USDA-approved rural areas. Like the VA loan program, gift money can be used to pay closing costs. You’ll need to provide a gift letter and supporting documents consistent with the gift letter rules of other loan programs.
Mortgage gift letter rules by property type
The rules around gift amounts vary by the type of property you’re buying:
- Primary residence: You can use gift funds to buy a primary residence. If you’re buying a single-family residence (not a duplex or other multi-unit property), you can make the down payment without contributing any of your own money.
- Second home: Lender rules around down payments on second homes are similar to the rules for a primary residence. If you’re putting down at least 20 percent, the gift can cover the entire amount. If your down payment is less than 20 percent, then at least 5 percent of your down payment must be drawn from your own funds.
- Investment property: You can’t use gift funds for the down payment on investment real estate.
Gift letter for mortgage template
Your lender might have a gift letter template it requires borrowers to use, so be sure to ask your loan officer before writing your own. Below is a sample for illustrative purposes only.
I/We, [GIVER], are gifting [AMOUNT OF GIFT, IN DOLLARS] to [RECIPIENT], who is my/our [NATURE OF RELATIONSHIP], in contribution to a down payment for the purchase of property at [ADDRESS OF PROPERTY].
These funds are being sourced from [ACCOUNT INSTITUTION/NUMBER], and are given freely and without any claim to the property or expectation of repayment, now or in the future.
GIVER NAME (PRINTED)
FAQ about down payment gifts
Not many rules dictate how much money can be gifted for a down payment, but there might be tax implications for the giver.
For 2023, someone can gift up to $17,000 without any tax consequences. By a tax rule known as “gift splitting,” married couples can gift up $34,000 in 2023 to another person without liability, as well.
That’s just the annual exemption, however. There is also an exemption that applies to gifts over a lifetime. For this reason, most givers won’t be subject to the gift tax, even if reporting a large gift.
Gift letters are required by mortgage lenders as documentation to prove that the funds received are a gift, not a loan, and that the donor is not involved in the home purchase. The gift letter is an official document that verifies the nature of the received money as a gift, with no expectation of repayment. It also helps inform the IRS about the gift amount for tax purposes.
Recipients of gift money for a mortgage do not have to report the money received as a gift to the IRS or pay taxes on its value.
If you’re using a significant amount of gift money as your down payment on a house, it’s best to wait until after the 60-day period before applying for a mortgage. Many lenders require that your assets be present in your account for a minimum of 60 days in order to consider them secure or “seasoned” funds. If you receive financial gifts or other significant cash injections within 60 days of purchasing a home, you should be prepared to provide documentation, such as gift letters, to demonstrate the source of those funds.
Gift letters are an important tool for potential homebuyers receiving help from family and friends for a down payment, as they document the source of the funds and prove that they are not expected to be repaid. Different loan programs have their own rules regarding who is eligible to give a gift, and if the gift is over a certain amount, the giver may need to file a gift tax return. Knowing the rules and preparing the necessary documents in advance can help borrowers be prepared when applying for a mortgage.