Gift Letter for Mortgage: Explained with a Template

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:

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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