A Guide To Using A Gift Letter For A Mortgage

Buying a home is an exciting goal, but the down payment can make it challenging for many aspiring homeowners. The good news is that if you have someone in your life generous enough to gift you a sum of money, you can use that money toward your down payment.

If you use a gift for your down payment, your lender is likely to require a gift letter. Keep reading to learn more about when you can use a gift for your down payment, what to include in your gift letter and more.

What Is A Gift Letter For A Mortgage?

A gift letter is a written statement for your lender that confirms your down payment funds are a gift and do not have to be repaid. The letter is signed by the donor and provides personal information so the lender can establish where the funds came from and why.

Why Are Gift Letters Important?

It’s not uncommon for home buyers – especially young, first-time buyers – to receive gifts from family members to help them pay for the down payment and closing costs on a home. These financial gifts can help make homeownership more accessible to young people.

But when you receive a sum of money for your down payment, your lender wants to be very clear on where those funds came from. In fact, you’ll usually have to provide recent bank statements during the mortgage underwriting process so your lender can investigate any large deposits.

The purpose of a gift letter is simply so the lender can ensure you won’t have to repay the money you’ve received for the down payment. Unless you’re working through a special program, a lender would generally disapprove of using borrowed funds to pay for your down payment.

How To Write A Gift Letter For A Mortgage

If you’re planning to use gifted funds for your down payment, you’ll typically have to provide a gift letter during the underwriting process. This letter can increase your chances of getting a mortgage since it proves to the lender you haven’t actually borrowed the money.

When crafting a gift letter, you’ll want to include the following information:

• The donor’s personal information and relationship to the borrower
• The borrower’s personal information
• The amount of money being gifted
• The date the funds were gifted
• The intended purpose of the gift
• A signed statement from the donor that no repayment is expected
• The borrower’s signature

Gift Letter For Mortgage Template

To make things easier, we’ve provided a template you can copy and give to your donors to complete. This will ensure your lender has all the details they need to move your loan forward in the home buying process.

Sample Gift Letter

Donor Information

Name:

Address:

Phone:

Relationship to Recipient:

Recipient Information

Name:

New Property Address:

Gift Information

Dollar Amount of Donate Gift: $

Date Gift Was Given (Or Will Be Given):

Recipient, will you use (or have you used) a portion of this gift for your earnest money deposit?

Yes or No

By signing this gift letter, both the donor and the recipient confirm that they didn’t receive the gift funds from any person, business or entity that has any interest in the property being sold or any person connected to the transaction, such as a seller, real estate agent, building, mortgage banker or any entity associated with them. The recipient and donor also agree that the gift does not have to be repaid.

Recipient Signature:                                              Date:

Donor Signature:                                        Date:

Mortgage Gift Letter Requirements By Loan Type

The rules on how you can utilize gift funds vary depending on the type of mortgage loan you’re applying for. Here’s what you need to know about some of the most popular types of loans:

• Fannie Mae and Freddie Mac conventional loans: Fannie Mae and Freddie Mac govern the rules regarding who can donate gifts for a conventional loan. Their regulations stipulate that gifts must be made by a family member, including a spouse, parent, grandparent, aunt or uncle, sibling, in-law, cousin, child, niece or nephew, grandchild, godparent, relative of your domestic partner or former relative.
• FHA loans: When obtaining an FHA loan, a borrower may use gifts from family members and other specific categories of individuals who have demonstrated a clear interest in the borrower’s life. Permitted donors can include family members, the borrower’s employer, the borrower’s labor union, a government agency or public entity that provides financial assistance, charitable organizations and close friends.
• VA loans: VA loans are less restrictive when it comes to who can donate cash gifts to borrowers. Instead of having a list of acceptable donors, these loans merely restrict gifts from the property seller, the builder or contractor, the developer, the buyer’s agent or the listing agent.
• USDA loans: USDA loans follow the same rules as VA loans in that, rather than only allowing gifts from specific family members and other interested parties, they allow gifts from anyone other than a select group of people (the same as for the VA loan).

Mortgage Gift Letter Requirements By Property Type

Just like gift requirements may differ depending on the type of loan you’re borrowing, they may also differ depending on the type of home you’re buying. Here are the rules for different types of properties:

• Primary residence: if you’re purchasing a primary residence, you can use a cash gift to pay for 100% of your down payment for a single-family unit. For a multi-family unit, you can use a cash gift for 100% of your down payment if you put at least 20% down and up to 95% of your down payment if you put down less than 20%. The gift money may also be used for your earnest money deposit and/or closing costs.
• Second home: If you’re purchasing a second home, you can use a gift to fund your down payment only if you plan to obtain a conventional loan. You will not be able to get an FHA, VA or USDA loan. However, unlike a primary residence, you may not use a cash gift to purchase a multi-family unit. Finally, when using a gift to buy a single-family second home, you must contribute at least 5% of the down payment if you put down less than 20%.
• Investment properties: If you’re planning to purchase an investment property, you may not be able to use any gift funds.

Gift Letter FAQs

If you’re considering using a gift to make a down payment on a home purchase, it’s important to know all the ins and outs. Keep reading to learn the answers to some of the most frequently asked questions about gift letters.

How much money can be gifted for a down payment?

There’s not necessarily a finite gift amount you can use for the down payment. Instead, you can use gift funds for a certain percentage of the down payment – up to 100%, depending on the type of loan and type of property.

Does a mortgage gift letter get reported to the IRS?

The IRS sets certain tax limits on gifts. In 2023, any gift amount under $17,000 doesn’t have to be reported – an increase from $16,000 in 2022. Each person is entitled to the annual exclusion, but it’s always beneficial to check with a tax professional on your unique situation.

What are the risks of signing a gift letter?

There aren’t necessarily any risks in signing a gift letter as long as you don’t need the funds to be repaid. The only time an issue may arise is if you give the money under the guise of a gift, but actually intend it to be a loan.

Is a gift letter required for a mortgage?

In most cases, you’ll need a gift letter if you plan to use gifted funds for your down payment. Lenders look into large deposits into your bank account leading up to your home purchase and want to ensure the funds aren’t actually a loan.

Who can give a gift letter for a mortgage?

Who can give a gift letter for a mortgage depends on the type of loan. Some loan types require that the gift come from a family member, while others allow the gift to be from anyone except a handful of parties involved in the sale of the home.

The Bottom Line

There’s a lot you’ll need to get in order during the home buying process. And if someone has gifted you the money for the down payment on your home, a gift letter is one of the many documents you’ll need.

Generally speaking, the earlier you start the process, the smoother it will go. You can start the mortgage application online today to see how much you may qualify for.