Have you recently received a cash gift for your wedding? If you are planning to use that as a down payment for your dream home you will need a ‘gift letter for your mortgage’.
Let’s dive into the details.
⚡ Key Takeaways
- What is a Gift Letter: A gift letter is a formal written communication that explicitly affirms that money obtained from a friend or family member is provided as a gift, not a loan.
- Lenders ask for a Gift Letter: Lenders require all the details linked to the transaction to mitigate their investment risk.
- Gift Letter regulations on different loan types: Gift Letter regulations varies from loan type, conventional and FHA have somewhat similiar regulations, whereas it may differ in USDA and VA loans.
What is a Gift Letter?
A gift letter is a document that records the transfer of any monetary gift from one person to another.
This letter acts as a token of confirmation when an individual gives a financial gift to help someone.
What is a Gift Letter for a Mortgage?
A gift letter for a mortgage is an important document for lenders. The lenders need the gift letter from the borrower in order to confirm the authentication of the payment, deposited as a down payment.
A gift letter ensures that the borrower is not taking an additional loan to pay for his down payment or closing costs.
How To Use Gift Money For Your Down Payment?
Confirming funds as gifts and not as loans is vital. Loans impact mortgage payments and increase lender’s risk. Also, strict anti-money laundering rules are put in place by the Government.
So if you are planning to use your gift money for the mortgage down payment, keep in mind the following conditions:
1. Proper Presentation Of Gift Money
If you are failing to prove down payment funds as gifts, it could lead to mortgage denial.
Obtain a gift letter for significant financial gifts used in the down payment. It’s a statement reassuring the lender that the funds are gifts, not loans. The giver must write, sign, and provide their details.
2. Be Aware Of The Gift Money Limit
Typically, lenders require a gift letter for gifts exceeding half your monthly income. For instance, if you make $9,000 a month, gifts over $4,500 would need explaining.
This applies to conventional, VA, and jumbo loans. For USDA or FHA loans, deposits larger than 1% of the home’s price or appraisal value, whichever is greater need to be explained.
3. Cooperate If Lenders Investigate
A gift letter isn’t the sole proof. Lenders might contact donors for withdrawal and deposit slips, ensuring legitimate transactions. Slips show the donor’s funds prior to the gift and no loan was taken for your down payment.
To ensure a compliant gift letter, take pre-emptive steps. Learn to write one, and collect the required information from the donors.
Why Lenders Care About Gift Lender Information?
Mortgage lenders care about the information on a gift letter for the following reasons:
1. To establish the gifter’s non-involvement in the home-buying process.
2. To ensure written confirmation that the received money is a gift, not a loan.
3. To notify the Internal Revenue Service (IRS) about the gift’s value for tax reasons.
Here are the key pieces of information in a gift letter that the lender wants to know:
- Value of the gift: Lenders verify if this aligns with the donor’s transaction and IRS gift limits.
- Property address linked to the down payment: The gift letter links gift funds to your purchased home.
- Details of donor’s account: Openly discuss this with the potential donor. Underwriters scrutinize this to avoid interested parties like agents or sellers. Not providing it can disqualify gift funds.
- Exact transaction date: You can deposit funds in your account or the purchase escrow.
- Relationship between the donor and borrower: Typically, loan programs allow funds only from family or friends. Funds from real estate agents, loan officers, or builders are prohibited in most cases.
- Complete donor info: Ensure the donor’s comfort sharing this; it’s necessary for the gift letter.
- Dated signatures on the letter: Both the donor and borrower must sign the letter with the dates mentioned.
Once everyone signs, the gift letter is a legally binding document.
Gift Letter Template
Here’s a template:
I/We do hereby certify the following:I/We, A and B Donor, have made a gift of $00,000 to C and D Borrower, and no repayment of this gift is expected or implied either in the form of cash or future services of the recipient(s).
The gift is to be applied toward the purchase of the property located at:
0000 X Lane, X Colony, Xstate, 0000
The source of funds for this gift is:
Bank name: ABC Bank
Type of account: (x) Checking ( ) Savings ( ) Other
Account No: 00000
Relationship to borrower: Parents
Donor’s name: A and B Donor
Street address: 0000 Giftor Avenue
City: ABC / State: ABC / Zip: 0000
Donor telephone: 000-000-0000
A and B Donor 9/1/23
*Donor Signature Date
C. Homebuyer 9/1/23
*Borrower Signature (Recipient) Date
D. Homebuyer 9/1/23
*Borrower Signature (Recipient) Date
*Please Note: Upon signing this gift letter, I/we affirm that the funds provided to the homebuyer(s) did not originate from any individual or entity involved in the property sale, such as the seller, real estate agent, broker, builder, loan officer, or any other affiliated party associated with this transaction.
WE ARE AWARE OF THE FOLLOWING:
I/We comprehend entirely that knowingly providing false statements during this mortgage application could lead to federal consequences, including fines, imprisonment, or both. This is in accordance with the stipulations outlined in Title 18, United States Code, Section 1014, and Section 1010.
Gift Letter Regulations By Loan Type
Gift letter regulations can vary by loan type. Here are some general guidelines:
Conventional loans owned by Fannie Mae and Freddie Mac exclusively permit the utilization of gift funds originating from individuals within your family circle. When considering mortgage applications, the term “family members” encompasses your:
- Parents (including biological, adoptive, step-, and foster parents)
- Grandparents or great-grandparents
- Aunts and uncles (including step-relatives)
- Cousins (including step-relatives and adoptive relatives)
- Nieces and nephews (including step-relatives)
- In-laws (including parents, grandparents, aunts, uncles, brothers-in-law, sisters-in-law, and future in-laws)
- Children (including biological, adoptive, and foster children)
- Siblings (including step-relatives, foster and adoptive siblings)
- Domestic partner
- Fiancé or fiancée
- Godparents (Fannie Mae only)
- Relatives of your domestic partner (Fannie Mae only)
- Former relatives (Fannie Mae only)
In FHA loans, the gift letter information remains the same as for conventional loans. Nonetheless, FHA guidelines permit the acceptance of gift funds from intimate friends who exhibit an evident involvement in your life.
This scope can encompass family members with whom you share a close bond (like cousins, nieces, and nephews), close friends, and even former spouses. The giver also needs to provide his bank statement showing the withdrawal of the gift funds and deposit into the borrower’s bank account.
USDA And VA Loans
USDA and VA loans impose minimal restrictions on down payment gifts, allowing virtually anyone to provide gift funds for purchasing a home. The sole exceptions encompass individuals or entities with vested interests in the sale, including:
- The individual selling the home being purchased.
- The entity or individual responsible for constructing the home being purchased.
- Your real estate agent or the seller’s agent.
Gift Letter Regulations By Property Type
There is a minor difference in the gift letter regulation in the property types:
- Primary residence: In the transaction of primary residence, the gift letter must clearly state that the gift is not a loan.
- Investment/Second home property: In these transactions too the gift letter is required in order to show the fund movement. Here, the lender may require a larger down payment along with some additional documentation.
For example, the lender may require the donor to provide documentation showing that the gift funds are from a non-business source.
A gift letter for a mortgage is a way for the lender to verify the source of the down payment funds. Make sure you provide the lender with all the above-explained details.
Additionally, talk to your gift-giver candidly, and ask for their consent before sharing their details with the lender.
Frequently Asked Questions
1. Why do i need a gift letter for a mortgage?
You need a gift letter for a mortgage if you are using gift funds to pay for your down payment or against closing costs.
2. Who can gift money for mortgage down payment?
Your parents, friends, relatives, or colleagues literally anyone can gift money for mortgage payments.
3. Can Someone Gift You Money to Buy a House?
You will need to create a letter that contains the donor's name, their connection to you, the gift's date and amount, and a declaration stating that the funds are given without the anticipation of being paid back.
4.Are there tax consequences for down payment gift funds?
As of 2022, the gift tax will be levied on gifts of more than $16,000 per donor.
5. What is a gift of equity letter?
A gift of equity letter states the amount of equity that the sellers are gifting along with the address of the property.
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