Buying a home can be thrilling, but when it comes to saving enough money for a down payment, that thrill becomes complicated.
Many times, homebuyers turn to family and others to get enough cash upfront for a mortgage. In fact, 27 percent of homebuyers aged 22-29 and 20 percent of those aged 30-39 received gifts from relatives or friends to help with their down payment, according to the National Association of Realtors.
These down payment gifts, while common, must be documented accurately in what’s known as a gift letter in order to be applied to a mortgage.
What is a gift letter for a mortgage?
A gift letter is a document that helps satisfy a mortgage lender’s requirement that a borrower’s down payment funds are coming from legitimate sources, explains Jessi Bostic, broker/owner of Kismet Lending in Salt Lake City. The 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.
“The gift letter becomes a road map for the underwriter,” Bostic says. “The underwriter has to be strict and has to make sure that gift is not another loan. They don’t want the borrower obligated to pay someone back besides the mortgage.”
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, Bostic says.
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 where the gift is sourced from
- Evidence of the giver’s ability to gift the money
- The giver’s relationship to the recipient
- 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 he or she contributed to the purchase of it.
What does a gift letter look like?
Your lender may 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)
Is there a limit on how much money you can receive?
Not many rules dictate how much money can be gifted for a down payment, Bostic says, but there are tax implications to consider for the giver.
For the 2019 tax year, a person can gift up to $15,000 without any tax consequences, according to the IRS. By a tax rule known as “gift splitting,” married couples can gift up to $30,000 to another person without liability, as well.
Otherwise, anything exceeding these amounts can be subject to a gift tax.
Other rules to consider
Any kind of blood relative or anyone with a defined relationship with the homebuyer can give a gift of cash, Bostic says, but the lender may ask for further documentation so that the source of the funds is clear.
“For instance, if the person’s fiancé is giving a gift of cash (and they are going to get married anyway), the lender needs something to show it is a relationship such as an application for marriage certificate, a receipt for a wedding band or a lease with both signatures,” Bostic explains.
However, a party with an interest in the property, such as the real estate agent listing it, can’t give a gift toward the down payment. Let’s say the agent is the mother of the person buying the property. By giving her son or daughter cash for a down payment, the agent now has a vested interest in selling the property, Bostic says. That’s a no-no.
Lastly, if you’re expecting to receive a gift for a down payment, it’s best to have the funds in your bank account months before you purchase a home.
“You only have to show 60 days of assets,” Bostic says. “If you get money in May and purchase the home in August, underwriters think it’s your money [and] you don’t need to source it. Thinking in advance can help.”