What is a Gift Letter for Your Mortgage?
If you are buying a home with not enough money for a significant down payment, you have some options to help bear the financial burden. Aside from down payment assistance programs or discount points, some may have the good fortune to call upon their friends and family for gifts. Rather than toaster ovens or blenders, we refer to monetary donations towards your new dream home.
However, when receiving funds in this manner, your lender will require you to provide a Gift Letter explaining that the money you received was indeed a gift and not new debt. The letter should outline that money does not need to be repaid. From the other perspective, make sure you know this requirement if you are donating towards someone else’s new home.
Before we get into the letter itself, let’s discuss what constitutes a gift regarding the mortgage process.
What is Considered a Gift?
Gifts can come from a variety of sources, sometimes referred to as donors. Donors may be friends or family, like parents, or possibly a gift from a wedding. In some cases, employers even contribute towards your house purchase, and even more rare, real estate agents sometimes contribute.
A gift does not need to come from one single source either. You can receive funds from several donors to put towards your down payment or closing costs.
Be aware that there are some restrictions. Gifts are not allowed on investment properties. So if you are hoping to purchase a second property for investment, make sure you have a different funding source. You can use gifts on primary and secondary homes, though, and this will apply to most options for first-time homebuyers. Check with your mortgage consultant to see if this applies to you.
How to Write a Gift Letter
A gift letter does not need to be complicated. You can certainly write a gift letter from scratch, and it can be as formal or informal as you’d like. The only caveat is that it must include the required information.
When writing your gift letter, make sure you include:
- Donor name, address, and phone number (You will need this for each donor if you have more than one)
- Nature of relationship
- The exact amount of the gift funds
- Clearly explain that repayment of funds is not required
- Payment method for the funds
- Address of the home you will purchase
Our Free Template
You can use this gift letter template for your situation. Simply fill in the blanks and send it off to your lender! It is also print-ready in case traditional mail is more your style.
Why Do I Need a Letter of Gift?
You may be wondering why you need to state that a gift is a gift. It’s a good question. As you go through the mortgage process, your lender will evaluate your loan during several steps. One of the most important of these steps is the underwriter review.
Underwriters give final approval on your loan. They are in charge of reviewing your documents and ensuring everything checks out. Because they scrutinize your finances, large deposits without explanation are a red flag. Providing a gift letter is crucial as it explains the source of your funds. The gift letter is not all either. In addition to the gift letter, your underwriter will need to verify your funds. Verification includes bank statements and may require proof from your donor to show the money leaving their account.
Unexplained funds can complicate your underwriting process and lead to conditional approval, in which you will need to provide more information. In this case, that would be a gift letter. There are several other letters of explanation you may need, such as explaining a credit event.
With that said, originators are surprisingly flexible. We want to get you approved! But we still need to follow the requirements for each loan program. Depending on the plan you choose, your requirements for a gift letter may vary.
FHA Gift Letter Requirements
In general, FHA loans come with fewer regulations when it comes to gift letters. To start, all funds for your transaction can come from a gift. FHA loans are more lenient since they are government programs designed to ensure homeownership. FHA loans also feature low credit score and down payment requirements but usually come with mortgage insurance.
Gifts for FHA loans may come from the following:
- A borrower’s family member
- A borrower’s employer or labor union
- A close friend with a clearly defined interest in the borrower
- A government agency that provides assistance
- A charitable organization
Conventional Gift Letter Requirements
A conventional loan originates through either Fannie Mae or Freddie Mac. Like FHA loans, conventional loans allow you to fund your transaction using gifts entirely. However, if you are purchasing a secondary home, you will need to provide at least 5% of the funds to avoid mortgage insurance.
You will also find that conventional loans come with more restrictions when it comes to the funding source. A conventional loan gift can be given by:
- a close relative: borrower’s spouse, child, or other dependents; any other relation by blood, marriage, adoption, or legal guardianship; fiance or domestic partner
- a donor may not be or have any affiliation with the builder, developer, real estate agent, or any other party interested in the transaction
The lender will also require the date when funds were transferred in addition to the regular gift information. However, Fannie and Freddie do not require the source of the donor’s funds.
USDA Gift Letter Requirements
USDA programs are limited to rural areas but offer zero down and also allow you to use gifts. The same sources as FHA loans are permitted with the caveat that friends have a documented relationship. Gift funds for USDA loans can be used towards closing costs.
USDA loans have few restrictions on the donor, but sources cannot be anyone with a vested interest in the property.
VA Gift Letter Requirements
VA programs work similarly to the other loan programs discussed. With VA loans, the only restriction is that gifts cannot come from someone with a vested interest. Va loans themselves offer some great benefits for veterans. Like any other, with VA loans, a lender will also want to verify whether gift funds exist by asking for evidence of a certificate of deposit or bank statement. A copy of the donor’s funds by check to the closing agent may also be required.
Maximum Gift Without Taxes 2020
Because gifts towards your mortgage are typically large amounts, it may be necessary to report your gift to the IRS. Although the donor is usually the one responsible for paying taxes on the gift, there are some rare situations in which the recipient can agree to pay it.
It’s not likely you will need to involve the IRS, however. You would need to give or receive more than $11 million over your lifetime to owe any considerable amount. You may not have to report your gift if it is less than $15,000 and you are filing for one of the following years: 2018, 2019, 2020, 2021.
Your Closing Approval
Once you have your gift letter ready, send it to your underwriter or mortgage consultant unless you have been directed otherwise. The letter of gift will be added to your file and ensure underwriters have no reason to hold up your closing! You are now one step closer to getting into your dream home!
Gift letter guidelines have not changed much throughout the years. Ultimately, it is just a statement that you have received funds in good faith and do not need to pay it back. It gives underwriters the evidence they need to be confident in the investment and make your dream of homeownership a reality. Here at On Q Financial, we believe the dream is inclusive and will work with you every step of the process to help ensure your dream is realized!
* Information is subject to change without notice. This is not an offer for extension of credit or a commitment to lend. Some restrictions may apply. This material is provided for information and educational purposes only. Always consult with a professional advisor before making financial decisions. OnQ1124200681Y00000AzsRl
About the Author
Before opening On Q Financial in 2005, John Bergman originated and funded 450 units a year as a loan officer. He founded the company with just $1M of personal life savings—committed to his vision for building the best independent mortgage organization in the industry.View John's Profile