Making a down payment on a home purchase can be a significant investment. If you’re lucky enough to have someone willing to contribute funds toward your down payment, there are just a few legal boxes you’ll need to check. One of these is providing your lender with a gift letter.
Here’s a look at what gift letters are for a mortgage, why they’re necessary and how to write one that meets your lender’s requirements.
What Is a Gift Letter for a Mortgage?
A gift letter is a written explanation provided to your mortgage lender when someone else gives you money toward a home purchase. It verifies that this cash is meant to be a gift rather than a loan to be repaid. Since that money is coming from another source and isn’t a liability, like a loan or other debt would be, your lender is able to count those funds toward your assets with no downside.
Gift letters are only necessary when down payment or home purchase funds are gifted to you, and only when you are using a mortgage loan to cover the remainder of the purchase. If you are purchasing a home outright in cash, or borrowing down-payment funds that will need to be repaid, a gift letter to your mortgage lender isn’t necessary.
[Read: Best Mortgage Lenders]
How to Write a Gift Letter
Not sure where to start with a gift letter? They’re actually pretty simple.
“An effective mortgage gift letter includes four parts,” says Dan Green, CEO of Cincinnati-based mortgage company Homebuyer.com. “You need the gifter’s name and address, the recipient’s name and address, a sentence that states that the gift is not a loan and doesn’t need to be repaid and receipts from the withdrawal and subsequent deposits.”
Green also advises that buyers should avoid commingling a gift deposit with other deposits. The deposit amount should be clear through the paper trail and the receipts should exactly match the amount of the gift.
You can search the internet for different examples of gift letters or create your own using the template below for guidance:
[Today’s Date]
To Whom It May Concern:
This letter serves to notify [YOUR LENDER’S NAME AND INFORMATION] that I/we, [GIFT-GIVER’S NAME(S)] are providing a monetary gift to [RECIPIENT’S NAME(S)], my/our [YOUR RELATIONSHIP (friend, child, grandchild, etc.)] in the amount of $[VALUE].
This gift is intended to be used toward the purchase of the property located at [ADDRESS]. As it is a gift, there is no expectation or requirement for repayment, monetary or otherwise, by the recipient.
The source of these gift funds include: [DESCRIPTION OF THE ACCOUNT (savings, checking account, investments, etc.) USED FOR THE FUNDS]. I/We have also included a copy of the account statement showing the availability and transfer of these funds.
Signed,
[DONOR(S)]
[CONTACT INFORMATION FOR THE GIFT-GIVER(S)]
While gift letters do need to include all pertinent information, they don’t need to be complex, says Green. “Don’t reinvent the wheel with your gift letter. A proper letter just attests that the gift is, in fact, a gift and not a loan to be repaid while providing a paper trail to lenders that proves that the cash isn’t being laundered.”
Gift letters don’t typically need to be notarized. However, each mortgage lender sets its own requirements.
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Why Lenders Need This Information
There are a few reasons why lenders require a gift letter with all relevant information.
“The primary objective is to document or source unidentified deposits,” says Kevin Martini, a certified mortgage advisor and founder of the Martini Mortgage Group. Lenders are required to do their due diligence to confirm that funds aren’t being laundered through the gift process, which is why a gift letter should be accompanied by bank statements, a copy of the check used or other proof of where the money came from.
Lenders also want to know that the borrower isn’t obligated to repay those funds. If the gift isn’t actually a gift, it’s a liability or a debt that can affect the buyer’s financial situation down the line. As part of the underwriting process, mortgage lenders will analyze household expenses, income and any debts that could make it more difficult to pay your new mortgage payment each month.
Lastly, lenders need to confirm that the funds are being gifted from an acceptable donor source. For example, some government loans require that the gift funds aren’t coming from anyone who has an interest in the sale of the property. This could include real estate agents, builders, someone related to the seller, etc.
Mortgage Down Payment Gift Rules
Each mortgage loan type has different rules surrounding gift funds, where they can come from and how they can be applied to a home purchase. Here are some of these rules.
Conventional Loans
If using a conventional mortgage loan to purchase a primary or even a secondary property, gift funds are allowed with some stipulations. You can use gift funds to cover up to 100% of your down payment, closing costs or even your financial reserves as long as you meet the minimum borrower requirements.
Gift donors can be a relative or non-relative with a familial relationship. Donors can also be the seller, as long as that individual is also a relative or a non-relative with a familial relationship.
A donor cannot be a non-related individual or anyone with an interest in the sale of the property, such as a real estate agent, builder, broker or property developer.
FHA Loans
Mortgage loans through the Federal Housing Administration have several requirements on gift funds. With these loans, the gift funds must:
— Not be considered toward a buyer’s verified cash reserves.
— Not come from a person or entity with an interest in the sale of the property (real estate agent, seller, builder or associated entity).
— Come from a verifiable source and be traceable as the donor’s own funds.
USDA Loans
With loans backed by the U.S. Department of Agriculture, gift funds must:
— Be properly sourced and cannot include cash on hand.
— Not come from anyone with a conflict of interest related to the sale of the property.
— Not be considered toward a buyer’s verified cash reserves.
If you receive cash back at closing, the amount received cannot exceed your verified gift funds.
VA Loans
Department of Veterans Affairs loans also allow for gift funds — with some rules. The biggest requirement is that gift funds must not come from an individual with a conflict of interest in the sale of the property. This includes someone affiliated with the builder, developer, real estate agent, seller or any other interested party to the transaction. A gift letter and proper documentation is required.
If you’re using a VA loan to purchase a property and are planning to retire from military service within the next 12 months, there are additional gift fund rules. For example, borrowers will need to cover at least 10% of the down payment from their own funds, as well as demonstrate cash reserves that cover at least six months’ principal, interest, taxes and insurance, excluding any cash gifts.
[Read: Best Mortgage Refinance Lenders.]
What Are The Tax Implications of a Gift Letter?
Any gift is considered taxable as far as the IRS is concerned. When it comes to gift funds and mortgage gift letters, the tax burden rests on the donor. However, this doesn’t always mean that the donor will need to pay taxes on that gift, especially right away.
The IRS allows individuals to give away as much as $18,000 to any single person in 2024 under the gift tax exclusion without triggering a taxable event. This means that if you wanted to gift $18,000 to each of your three children for their first home purchase, you could give away up to $54,000 total without paying taxes on the gift funds.
You can also choose to gift funds to multiple individuals involved in the same home purchase transaction, such as an adult child and their spouse. In this case, you could give your son and daughter-in-law each a gift of $18,000 (for a total of $36,000) toward their home purchase without triggering the gift tax. If you and your spouse each wanted to gift funds to your son and daughter-in-law, this could mean giving up to $72,000 total without a taxable event.
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