Need help writing a gift letter for a mortgage? You've come to the right place.
If you are in the market to purchase your first home, it's not uncommon to get some financial help from your family members or even close friends. This financial help is usually given as a gift.
For such monetary gifts, most lenders typically require a written letter confirming that this money is indeed a gift and not a loan.
Before you draft the letter, it's important to understand why one is needed and what you need to include in it so your lender accepts it.
At the end of this article, we've included a gift letter template to help you draft your own gift letter for a mortgage.
What is a gift letter for a mortgage?
Put simply, a gift letter for a mortgage is a formal letter stating that funds from a donor are a gift that never has to be repaid. A mortgage lender reviews this as part of the application package.
There are a number of key components a lender will look out for:
- The name of the donor, address and phone number
- Relationship to donor
- The precise gift dollar amount
- Funds transfer date
- A clear statement that this is purely a gift with no payback required
- Address of the property that the funds will be used for
- Payment method the donor is using for the transfer (bank account information, checks, etc)
To sum it up, as you write your mortgage gift letter, you want to make sure that it's detailed and precise. The clearer the information in your letter is, the faster you will receive a response. The gift-giver would also need to provide a letter that helps to validate the gift.
Keep in mind that a gift letter is different from a proof of funds letter which the bank also needs to validate that you actually have the funds available.
Why does the bank ask for a mortgage gift letter?
You might be wondering why a lender asks for a mortgage gift letter in the first place.
Well, lenders want to make sure they know what your existing debt obligations are before you take on a mortgage. This is because a person who has a high debt burden presents a much higher risk to the lender.
They essentially want to avoid scenarios where someone receives funds for a home downpayment, and then a shorter time later has to pay it back. If this were to happen, it could make it more challenging for the borrower to make mortgage payments.
That being said, someone who receives a portion of or all of their home downpayment funds as gift money is a completely different story. They would not owe anyone a payment which means a lower overall debt obligation.
If banks did not insist on a formal mortgage gift letter, they might encounter increased fraudulent activity. As a result, an official letter clears up any questions and concerns they might have.
It is important to contact your lender and understand the exact information they need in the letter. Some lenders may require additional information to accept the gift.
How much money can you receive as a gift?
There are a few rules that apply to down payment gifts. These boil down largely to the tax implications involved.
For starters, a gift recipient does not face any tax consequences. On the other hand, a gift-giver might. There are certain thresholds above which a gift-giver would have to pay taxes based on IRS gift tax rules.
As of 2020, a person can gift up to $15,000 tax-free. A married couple filing jointly can gift up to $30,000 free from any tax penalties. The IRS does not require any additional filings if the criteria above are met.
On the flip side, if the gift exceeds the limits above, there will be tax implications. The gift-giver must file a return.
If you are giving a gift, we encourage you to speak to your accountant or tax advisor to understand the impact on your finances.
Who can give you a gift?
So you've nailed down how much you can receive as a gift. However, you still need to confirm another piece of information - who is giving you the gift.
You see many lenders and mortgage programs have different rules on this. Some only allow gifts from a blood relative, or even a godparent, while others allow gifts from friends and non-profit organizations.
Some recent examples of this include conventional loans through Fannie Mae or Freddie Mac. For these, family members are the only eligible donors. This can include family by blood, marriage, or adoption. It can also include fiances.
Another category is FHA loans. Under FHA loans, nieces, nephews, and cousins do not count. However, close friends do. In addition, non-profits, employers, and labor unions are do qualify.
The most permissive category is VA and USDA loans. Under these loans, anyone can be a gift donor. The only restriction is that the person cannot hold any interest in the purchase of your home. An example of this would be your housing agent or your lawyer should you use one.
Getting a gift of equity? Here's what you should know
Another alternative your donor may provide is a gift of equity. This gift occurs when you purchase a property from a relative for less than the selling price.
The selling price minus the price that you pay is the gift of equity. Gifts in this category can only come from a family member. You can use your gift of equity towards your down payment, points, and closing costs.
Moreover, FHA loans allow the use of gifts of equity giving you more options to pay down the loan.
On the other hand, jumbo and VA loans do not permit the use of gifts of equity.
Similar to the above, a borrower must submit a gift of equity letter to get the ball rolling. Minimum contribution amounts still apply.
Mortgage gift letter template
Now that we have ironed out the fine details around a gift letter for mortgage, its time to take a look at a gift letter template.
Sample gift letter for mortgage
Address: [Insert your address]
To: [Insert bank name or lender name and address]
I/We [insert name(s) of gift-giver(s)] intend to make a gift of $[exact dollar amount of gift] to [name of recipient]. [Name of recipient] is my / our [insert relationship].
This gift will go towards the purchase of the home located at [insert the address of the property under consideration].
[Name of recipient] is not expected to repay this gift either in cash or services. I/we will not file a lien against the property.
The source of the gift is from [insert name of the bank, description of the investment, or other accounts the gift is coming from].
[Insert donor signature(s)]
[Donor address, telephone, and email]
A gift letter for a mortgage is a crucial document in the homeownership process. By following the simple guidelines above, you'll be well on your way to getting your loan application approved! Best of luck with the process!