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Owning a home is still the American Dream, but in an era when home prices have been rising far faster than incomes, saving for a down payment poses a significant challenge.
To cobble together enough savings, many homebuyers turn to family and friends for financial help. Fully 25 percent of homebuyers ages 23 to 31 and 17 percent of those ages 32 to 41 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.
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 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 they contributed to the purchase of it.
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, employer, close longtime friend, an approved down payment assistance (DPA) program or a nonprofit. Freddie Mac also allows borrowers to use wedding gifts, so long as you provide a copy of your marriage license.
- 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 rural corners of the country. 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: No dice. 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)
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, but there might be tax implications for the giver.
For 2022 or 2023, someone can gift up to $16,000 or up to $17,000, respectively, without any tax consequences. By a tax rule known as “gift splitting,” married couples can gift up to $32,000 in 2022 or $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.
Why are gift letters important?
Mortgage lenders take gift letters seriously for a variety of reasons.
One obvious underwriting concern is your ability to repay. If your down payment windfall is really a loan that you’ll have to pay back, that affects your capacity to pay the underlying mortgage.
Fraud and money laundering are other concerns. While most gifts are indeed well-intended transfers of cash, unscrupulous sellers, real estate agents or loan officers can play games with the money. Criminals can use down payment “gifts” as a way to wash dirty cash. The mortgage process is highly regulated and tightly regimented; the gift letter is just one more way for lenders to keep everything clean and clearly documented.
Other rules to consider
Any kind of blood relative or anyone with a defined relationship with the homebuyer can give a gift of cash, but the lender might ask for further documentation so that the source of the funds is clear.
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. 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 at least two months before you purchase a home.