Are your parents funding your mortgage down payment? You need a gift letter


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When buying a house, one common requirement is a down payment. The amount of the down payment can range from a small percentage of the total price of the house to 20 percent or more. One way for a buyer to make the down payment is by using gift money. But there are rules for this process.

What is a gift letter?

When a buyer uses gift money for the down payment, the lender will require a gift letter from the donor stating that the money was given to the buyer as a gift and that there is no responsibility on the part of the gift recipient to pay back the money. The gift letter is usually a template given to the donor by the lender. Both the donor and gift recipient sign the gift letter.

In addition to a gift letter, the donor should give the borrower’s mortgage lender a bank account statement to prove that he has the money to give.

Making a down payment on a house with gift money  

Lenders need to document where the buyer’s down payment money is coming from. The gift letter assures the lender that the gift money is available and that the borrower is not in debt to the donor. Also, without the gift letter, the IRS could tax the donor.

If making a down payment of less than 20 percent using gift money, the borrower must pay down at least 5 percent of the sale price and the rest of the down payment can be gift money. If the down payment is more than 20 percent, gift money can be used for the whole down payment.

Who can give a gift?

For the most part, anyone giving gift money must be a family member. Non-relatives, such as godparents, can give money as a gift if the recipient can prove that there is a close relationship.  

Limits on gift amounts

There are also limits on the amount of gift money one can receive.

  • Annual limit. A donor can give a family member up to $14,000 a year without the donor or recipient incurring any tax consequences. Keep in mind that each family member can give up to $14,000. So, the recipient could get $14,000 from each family member.
  • Lifetime limit. The lifetime limit on gift-giving is currently $5.34 million. Any amount over that limit means the donor must pay a gift tax of up to 40 percent.

The IRS is watching 

If a donor goes over the limit for gift money to a relative, the donor is responsible for any gift tax imposed. A donor would be wise to consult a tax accountant or financial planner before giving gift money.

Use Bankrate’s mortgage calculator to figure out how much your monthly payment will be.