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Buying a house can be an exciting experience, but when it comes to saving enough money for closing costs and down payment, that excitement suddenly becomes a challenge. Fortunately, gifts have been the saving grace for homebuyers struggling to save for their potential home down payment and closing costs from time immemorial.
In fact, a recent study by the National Association of Realtors revealed that 27% of those aged 22-29 and 20% of those aged 30-39 received gifts to aid with their home down payment expenses. However, while down payment gifts are becoming the norm, they must be properly accounted for in what is known as a gift letter to be eligible in a mortgage process.
This article will straighten the details surrounding using gifts and all you need to know about mortgage gift letters.
What Is a Gift Letter for a Mortgage?
A mortgage gift letter is a note from your donor stating that the down payment money is a gift. It shows that you’re not obligated to pay back the money. When you make use of a down payment gift, the lender wants to know that you won’t have to worry about repaying the donor when you agree to make monthly mortgage payments.
A lender may ask for a bank statement to prove your donor had money to give you for a down payment. The gift letter may also help the donor avoid paying a large federal gift tax. This is because the IRS could tax the donor up to 40% of the donation amount without the letter.
Why Are Gift Letters Required?
You may wonder why you must indicate that the down payment money is a gift. Throughout the mortgage process, your lender will assess your loan at numerous stages. One of such stages is the underwriter review.
Underwriters finalize your loan. They oversee checking your loan documents and ensuring that your documents are in line with the loan program requirements. Because it is common for loan underwriters to investigate your finances, large unjustified deposits raise suspicions.
A gift letter reveals the source of your funds and is essential. The gift letter isn’t all. Along with the gift letter, your underwriter will need to verify your finances. Verification includes bank statements and may demand verification from your contributor that money left their account.
What Is in a Gift Letter for a Mortgage?
You should have a gift letter if you’ve received a substantial sum of money from relatives or friends to cover your down payment. But without specifics on how it’s set up and what information it contains, it may be meaningless. Most mortgage lenders will require that you include the following information in your gift letter:
- The gift’s exact value.
- A signed statement that no payback is expected.
- The property address for the down payment.
- Account details for the donor, including the name of bank or investment firm, account number, and kind of account (checking, savings, or investment).
- Date of transfer or pending transfer.
- Relationship of the donor to borrower
- Name, address, and phone number of the donor.
- Both the giver and receiver’s dated signatures.
Remember that if you’re receiving more than one gift for your down payment, you’ll need to provide more than one gift letter to the lender plus additional financial information about the various donors.
How Much Money Can I Receive as a Gift?
Many home financing programs allow for some or all a borrower’s down payment money to come from various sources. A relative or friend, your employer or local labor union, a government body, or even a charity can give you gift money for your down payment.
However, the amount of gift funds you can use for your down payment varies by mortgage lending programs. According to the IRS, a single individual can gift up to $16,000 tax-free. Married couples filing jointly can also gift up to $30,000 to another individual tax-free. Anything beyond this threshold may be subject to a gift tax.
Mortgage Type Gift Letter Regulations
The restrictions for giving and receiving gifts differ depending on the type of mortgage loanyou use to buy a property, so ask your loan officer for all the details beforehand.
Conventional Loan
Conventional Fannie Mae and Freddie Mac loans only enable you to use gift money from family members. In a mortgage situation, family members include:
- Your spouse
- Parents (biological, adoptive, step- and foster parents all qualify)
- Your grandparents
- Uncles and aunts (including step-relatives)
- Cousins (including step-relatives and adoptive relatives)
- Nephews and nieces (including step-relatives)
- In-laws (including parents, grandparents, aunts, uncles, brothers-in-law, and sisters-in-law)
- Your kids (biological, adoptive, step- and foster children all qualify)
- Siblings (including step-relatives, foster, and adoptive siblings)
- Your domestic partner
- Your fiancée
If you acquire a Fannie Mae loan, you can use gift money from a prospective in-law.
USDA & VA Loan
Down payment gifts are not restricted when it comes to USDAand VA loans. Almost anyone can give you gift monies for a USDA or VA loan. The only exclusions are parties with a stake in the sale, such as:
- The seller of your new home
- The person or firm who built your new home.
- The builder of your new home
- Your real estate agent or the seller’s agent
FHA Loan
The FHA allows practically all family members (even prospective in-laws) to contribute to your down payment. The only distinction is that typical FHA restrictions prohibit gift monies from cousins, nieces, or nephews.
In addition, the FHA does accept gifts from close friends who care about you. This includes close family members (such as cousins, nieces, and nephews), close friends, and even ex-spouses.
The FHA also says you can get gift money from:
- Your employer
- Your union
- A charity that helps financially
- A public agency that assists first-time homebuyers.
One of the major upsides to the FHA gift structure is that it allows for the total minimum down payment in gifts.
>> More: Best FHA Loan Lenders
Property Type Gift Letter Regulations
The way you use your gift monies will largely depend on the type of property you’re closing on. Here are some examples of how property types can impact your monetary gifts for your mortgage down payment.
Primary Residencies
You can use your gift money for a down payment on a principal house. However, you must adhere to the following rules:
- If it’s a single-family home, you can use gift funds without putting any money down.
- You can buy a multi-family home without contributing to the down payment if the down payment is 20% or greater.
- If your down payment is less than 20% on a multi-unit property, you must provide at least 5% of your funds.
Secondary Residencies
If you’re purchasing a potential second home through the use of a conventional loan (not FHA, USDA, or VA), the following requirements apply:
- If you put down 20% or more, the gift can cover the entire amount.
- If it’s less than 20%, you must contribute 5% of the total.
Investment Properties
Gift funds cannot be used toward the down payment on an investment property.
Mortgage Gift Letter Example
If you use a gift as a down payment, your lender may provide you with a template. If they don’t provide one, utilize our sample template and fill in your information:
I/We ______________________ [Name(s) of gift fund donor(s)] do hereby certify that I/we are making a gift of $XXX to my/our ______________________ [List relationship of borrower(s)]to be applied toward the purchase of the following property: ____________________
I/we certify that repayment of this gift is not expected or implied. I/we certify that these gift funds are/were not made available from any person or entity with interest in the subject property including, but not limited to, the seller(s), real estate agent(s), broker(s), lender(s), builder or loan officer.
____________________________________________
* Donor Signature(s) Date
____________________________________________
* Donor Signature(s) Date
Date of Gift Funds Transfer (date to match transfer documentation):
_________________
Donor name(s):
Street address:
City: State: Zip:
Donor Telephone:
Donor Email Address: _____________________________________________________
I / we acknowledge the acceptance of this gift and affirm there has been no communication, direct or implied, that repayment is expected.
____________________________________________ Date: ___________________
____________________________________________ Date: ___________________
When completed, a typical gift letter would look like the following:
GIFT LETTER
Date: January 7, 2022
To Whom It May Concern,
This letter confirms that the undersigned is making a financial gift of $ 30,0000 to John Doe and Lily Doe.
For use towards the purchase of the property situated at 920 Gaston St SW, Atlanta, Georgia (GA), 30310
We, the undersigned Recipients and Donors, hereby certify that:
- The Donor is an immediate family member.
- These funds are a genuine gift from the Donors; as such, they are not required to be repaid at any point.
- No part of the financial gift is being provided by any third party having any interest (direct or indirect) in the sale of the property.
Recipient(s)
Name: John Doe
Signature: JohnDoeMax
Date: January 7, 2022
Donors
Name: Jane Doe
Signature: Jane Doe
Date: January 7, 2022
Relationship: Mother of John Doe
Address: 123 SMLStreet
City: Atlanta
Telephone: 416 -555 – 2222
The source of gift funds is:
Bank Name: Western Savings Bank
Type of Account: [ ] Checking [x ] Savings [ ] Other
Account No.: 12345678
WE ARE AWARE OF THE FOLLOWING:
I/We fully understand that it is a federal crime punishable by fine or imprisonment, or both, to knowingly make any false statements when applying for this mortgage, as applicable under the provision of Title 18, United States Code, Section 1014 and Section 1010.
Does a Mortgage Gift Letter Get Reported to the IRS?
There is no need to declare the gift to the IRS or pay any gift or income tax on its value. The restrictions are slightly different if you’re contributing the gift money. Any individual can give a down payment gift of $15,000 without getting taxed. Above that amount, a gift tax return is required. But you won’t be taxed on it.
Gifts reported on a tax return are offset against a lifetime exclusion. The current exclusion is $11.4 million. A tax return is prepared to track lifetime gifts used to calculate estate taxes. Above $11.4 million, the gift tax kicks in, ranging from 18% to 40%.
More importantly, remember that tax laws change often. Consult a tax advisor to ensure you grasp the current laws before giving or receiving gift money for your down payment.
Does a Mortgage Gift Letter Need to be Notarized?
The short answer is no. But for it to be valid, both you and the donor must sign it. The gift letter should be acceptable by your lender as long as it was written by the donor, outlines your relationship, and is signed by both of you. That document alone may be sufficient proof that you will not be required to repay any of the funds received.
How Do You Prove Gift Money for Mortgage?
Gifts for a mortgage must be documented. Therefore, your online mortgage lender will want to view your bank account transaction records. Cash gifts cannot be brought to closure. An official gift receipt and a gift letter signed by both the donor and the recipient must be provided proof of the donation.
What is a Gift of Equity Letter?
A gift of equity letter permits a seller to gift equity to a family member, fiancé/fiancée, or domestic partner of the buyer. A gift of equity can help families pass along the property to future generations. Home equity is the difference between the home’s value and the loan balance. With a gift of equity:
- The gift is the seller’s equity given to the buyer’s family.
- The documentation is similar to a gift letter.
- No actual money is exchanged.
- The equity is credited to the buyer upon closing.
The rules for gifting equity differ by loan type. A quick recap:
- Fannie Mae/Freddie Mac. Equity gifts must be gifted to a family member, fiancé/fiancée, or domestic partner
- FHA. Gifts of equity are authorized for family home sales.
- USDA. Any equity gift must be deducted from the purchase price.
- VA. The VA prohibits equity donations.
Bottom Line: What Is a Gift Letter for a Mortgage?
There you have it. Hopefully all your questions about mortgage gift letters were answered. Before you make any decision, it may be wise to check with a Certified Public Accountant or another Tax Expert to ensure you understand the legality and potential taxes that come with mortgage gift letters.
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