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7 min read Feb 16, 2024

Gift Letter for Mortgage: Explained with a Template

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In 2022, 22% of new homebuyers used gift money to pay their mortgage down payment. If you have an ongoing mortgage, you can also use your gift money as a down payment. But to make it a legal transaction you will need a gift letter for a mortgage.

A gift letter for a mortgage is an acknowledgment from your donor that the funds for the down payment were provided to you as a gift and not a loan.

Importance OF A Gift Letter For Mortgage

  • A gift letter is a formal declaration that outines that the amount used to pay the down payment is a gift and not a loan.
  • Lenders require all the details linked to the transaction to mitigate their investment risk.
  • You need to prove the source of the gift money so that your lender verifies it.

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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 to confirm the authentication of the down payment.

Also, a gift letter ensures that the borrower hasn’t taken any additional loan to pay their down payment or closing costs.

How to Use Gift Money for Your Down Payment?

It is important to confirm that the funds act as gifts and not as loans. This is because loans impact mortgage payments and increase lender’s risk.

Here are some guidelines to help you use your gift money for the down payment:

  • Provide Evidence of Gift Money: Explain to the lender that the money used for the down payment are gift and not a loan. The donor must sign this letter.
  • Cooperate with Lender Inquires: You must not hesitate to ask your donor to give their bank details for the letter. The transaction details help lenders confirm that the money used is a gift and not a loan.

Why Do Lenders Ask for Gift Letter Information?

Mortgage lenders require confirmation that the money you used for a downpayment is a gift and not a loan. Also, to establish the donor’s non-involvement in the home-buying process.

The lender would look out for these key pieces of information in a gift letter:

  • Value of the Gift: Lenders verify if this aligns with the donor’s transaction and Internal Revenue System (IRS) gift limits.
  • Details of Donor’s Account: The lenders scrutinize the details of the donor’s account to avoid parties like agents or sellers. Moreover, if you can’t provide the details, it can disqualify gift funds.
  • Exact Transaction Date: The gift letter must include the exact date of the transaction of the gift funds.
  • Relationship Between the Donor and Borrower: Gift money is allowed only from the borrower’s family or close associates. This makes it important for you to verify your relationship with the donor.
  • Complete Donor Information: This is necessary for the gift letter, however, you must ensure the donor’s comfort while sharing it.
  • Dated Signatures on the Letter: Both the donor and borrower must sign the letter with the dates mentioned.

Gift Letter Template

Here’s a template:

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 with the borrower: XYZ

Donor’s name: A and B Donor
Street address: XYZ
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

For conventional loans owned by Fannie Mae and Freddie Mac, you can use gifts for downpayment from individuals within your family circle. They include your partner, parents, siblings, and fiance.

FHA Loans

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 have a direct involvement in your life.

Also, FHA allows family members with whom you share a close bond (like cousins, nieces, and nephews), close friends, and even former spouses. The donor also needs to provide their 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. It allows anyone to provide gift funds for purchasing a home. The sole exceptions encompass individuals or entities with vested interests in the home sale, including:

  • The individual selling the property
  • The entity or individual responsible for constructing the home
  • The buyer’s real estate agent or the seller’s agent

Gift Letter Regulations by Property Type

There are minor differences in the gift letter regulations based on property types:

  • Primary Residence: In the transaction of primary residence, the gift letter must clearly state that the gift is not a loan.
  • Investment or Second Home Property: In these transactions, the buyer needs to provide the gift letter in order to show the fund movement. Here, the lender may require a larger down payment along with the documents.

For example, the lender may require the donor to provide documentation showing that the gift funds are from a non-commercial source.

Bottom Line

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, you must talk to the donor and ask for their consent before you share their details with the lender.

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Frequently Asked Questions

Why do I need a gift letter for a mortgage?

You would need a gift letter for a mortgage if you plan to use gift funds to pay for your down payment or closing costs.

Who can gift money for mortgage down payment?

Your parents, friends, relatives, or colleagues literally anyone can gift money for mortgage payments.

Can someone gift you money to buy a house?

Yes, you must create a letter containing the donor's name and their connection to you. Also, the letter should include the gift's date and amount, and a declaration stating that the funds are given without the intention of being paid back.

Are there tax consequences for down payment gift funds?

From 2022 onwards, gifts that are more than $16,000 per donor are subject to the gift tax.

What is a gift of equity letter?

An equity gift letter from the seller includes the property's address and the amount of equity they are gifting.

Related: gift letters, mortgage gift, gift check for mortgage, gift letter mortgage, real estate gift letter, gift letter for real estate, downpayment gift letter, gift for mortgage lender, mortgage gift letter, gifting letter for mortgage, gift funds for mortgage.

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