Josephine Norton
When applying for a mortgage, lenders need to know that the money you're using for your down payment is yours and not a loan. A gift letter for a mortgage is a sworn statement that verifies that the funds being used to purchase a property were gifted. It assures your lender that the sudden influx of cash in your account is a gift and not a loan. A gift letter is a legally binding document that confirms that the money is a gift with no expectation of repayment.
| Characteristics | Values |
|---|---|
| Purpose | To assure the lender that the money is a gift and not a loan |
| Who needs it | The lender |
| Who writes it | The donor |
| Who signs it | Both the donor and the recipient |
| When to write it | When the recipient applies for a mortgage |
| What to include | Donor's basic contact information, recipient's full name and their relationship to the donor, the exact dollar amount of the gift, the date of transfer, source of the gift funds including institution name, account name and number |
| What to attach | Gift check, deposit slip, withdrawal slip or bank statement, check made out to the closing agent |
What You'll Learn
The purpose of a gift letter for a mortgage
When applying for a mortgage, lenders need to know that the money you use for your down payment is yours and not a loan. A gift letter for a mortgage is a sworn statement that verifies that the funds being used to purchase a property were a gift and not a loan. It is a legally binding document that confirms that the money is a gift with no expectation of repayment. The purpose of a gift letter is to assure your lender that the sudden influx of cash in your account is a gift and not a loan. This is important because if it's a loan, you will be deeper in debt than the lender had calculated, and you may no longer qualify for the same loan terms or any loan at all.
A gift letter for a mortgage proves that the funds are a gift and do not have to be repaid. It also shows that the giver is not involved in the purchase or ownership of the home. The letter should include the donor's basic contact information, the recipient's full name, and the nature of their relationship with the donor. It should also include the exact dollar amount of the gift and the date of transfer. The donor should disclose the source of the gift funds, including the institution name, account name, and account number. The gift letter has to be backed up with paperwork showing where the funds came from, such as bank statements, withdrawal slips, deposit slips, and cheques.
Most loan programs allow gifts, and the money can come from a relative or friend, your employer, a local labour union, a government agency, or a charitable organization. The amount of money you can accept as a gift for your down payment varies depending on the type of loan you get. Conventional loans, for example, require a minimum 3% down payment that can come entirely from a gift if you're buying a single-family residence. It's important to note that if the gift funds were received within 60 days of your application, the mortgage company may be suspicious of the money in your account. It's recommended to wait until that 60-day limit passes before applying for a mortgage.
Illinois Mortgage Release: What You Need to Know
You may want to see also
Who can give you money for a mortgage
When it comes to who can give you money for a mortgage, there are a few things to consider. Firstly, the money is typically gifted by a relative or significant other. However, it's important to note that the donor cannot be the seller, builder, real estate agent, broker, or anyone else with a financial interest in the property's sale. In some cases, if a family member is the seller, they may still be allowed to provide funds.
According to the USDA, anyone can contribute money toward a mortgage down payment as long as they are not a "source with an interest in the sale of the property". Similarly, the VA specifies that money can come from any "donor without affiliation with the builder, developer, real estate agent, or any other interested party".
Fannie Mae allows gift funds from "related persons", including anyone related by blood, marriage, or adoption, as well as guardians. Freddie Mac has similar rules. Additionally, governmental agencies or public entities that provide homeownership assistance to low and moderate-income first-time buyers can be a source of gift funds.
For conventional loans, lenders usually allow gift money for down payments, closing costs, and financial reserves, but the source is typically limited to family members and romantic partners. FHA loans, which are government-backed loans for first-time or low-to-moderate-income families, also accept gift money for down payments, closing costs, or reserves. However, gift funds cannot be used for mortgage reserves in FHA and VA loans.
It's important to note that there may be tax implications for the giver if the gift amount exceeds certain thresholds. For 2025, an individual can gift up to $19,000 per person without tax consequences. The IRS allows individuals to gift up to $18,000 to any single person in 2024 without triggering a taxable event.
Mortgage Fraud: Reporting and Protecting Your Finances
You may want to see also
What a gift letter for a mortgage should include
A gift letter for a mortgage is a sworn statement that verifies that the funds being used to purchase a property are a gift and not an undisclosed loan. It is a legally binding document that is required to be signed by both the donor and the recipient. The letter should include the following:
- Donor's basic contact information, including a telephone number.
- Recipient's full name and their relationship with the donor.
- Exact dollar amount of the gift.
- Date of transfer.
- Source of the gift funds, including the institution name, account name, and account number.
- A statement that the donor is not affiliated with any party involved in the real estate transaction, except the recipient. This includes developers, agents, or any other interested individuals or organizations.
- A fraud notice, stating that if the money is not a gift, both parties could be accused of mortgage fraud.
- Paperwork showing where the funds came from, such as bank statements, withdrawal slips, deposit slips, and cheques.
It is important to note that the requirements for a gift letter may vary depending on the lender and loan type. It is always a good idea to check with your lender to ensure that your gift letter includes all the necessary information and meets their specific requirements.
Setting Up a Mortgage: Dependents and Their Homes
You may want to see also
How to prove gifted money is legitimate
When applying for a mortgage, lenders will want to know where your down payment money came from, including whether any of it was gifted. This is because gifted money can artificially inflate your bank account, and lenders need a realistic sense of how much mortgage you can afford. They also want to ensure that gifted money isn't a loan in disguise, which would add to your debt load and hinder your ability to pay back your mortgage.
To prove that gifted money is legitimate, you will need to provide a gift letter. This is a document that helps satisfy the requirement that a borrower's down payment funds come from legitimate sources. The letter involves the giver verifying, in writing, that they did, in fact, gift the money to the borrower, that there is no expectation of repayment, and that the funds are to be used for the purchase of a home. The letter should include the gift amount, the donor's contact information, the donor's relationship to you, and confirmation that the donor does not expect repayment. The donor will need to sign off on the letter and provide it to the mortgage lender.
In addition to the gift letter, you will also need to provide documentation of the transfer of money from the donor to the homebuyer. This can include bank statements showing the movement of funds between the giver and the buyer or a receipt of the cashier's check as given to the closing agent. The donor may also need to provide proof of ID and source of funds, such as bank statements showing the origin of the money. It is recommended to receive the gifted funds at least two months before applying for a mortgage so that they are "seasoned". However, it is still possible to use gifted funds received within 60 days of your application, but additional documentation may be required.
It is important to note that different lenders have varying standards and restrictions around gifted deposits, so it is crucial to be transparent and inform your lender early on about the gifted deposit. Be prepared to answer questions about the source of the gift and your relationship with the donor. Additionally, there may be potential inheritance tax implications depending on the amount gifted, the donor's circumstances, and whether the donor dies within a certain number of years of giving the gift.
Removing the Deceased's Name from a Mortgage
You may want to see also
Gift letter templates
When applying for a mortgage, lenders need to know that the money you use for your down payment is yours and not a loan. A gift letter for a mortgage assures your lender that the money is a gift and not a loan. It also verifies that the giver isn't involved in the purchase or ownership of the home.
Template 1
[Donor name, address, phone number, and relationship to the recipient]
[Indicate whether the recipient will use (or has used) a portion of the gift for their earnest money deposit]
By signing this gift letter, both the donor and recipient confirm that they did not 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 the seller, real estate agent, builder, mortgage banker, or any entity associated with them).
Template 2
I/We [name of gift-giver(s)] intend to make a GIFT of $ [dollar amount of gift] to [name(s) of recipient(s)], my/our [relationship, such as son or daughter], to be applied toward the purchase of the property located at: [address of the house you're buying, if known]. There is no repayment expected or implied in this gift, either in the form of cash or by future services, and no lien will be filed by me/us against the property.
Template 3
[Lender name and address]
Re: Gift Letter for [name of borrower]
To whom it may concern:
I, [name of donor], hereby declare that I have given a cash gift of $[amount] to my [relationship to borrower], [name of borrower], to be used toward the purchase of the property located at [property address]. This gift does not need to be repaid and I am in no way dependent on the property being sold or the terms of the sale.
The funds were transferred from my account to the borrower's account on [date of transfer]. Please find attached a copy of the bank statement showing the withdrawal from my account.
Please do not hesitate to contact me if you require any further information or documentation regarding this gift.
Yours sincerely,
[Name of donor]
Better Mortgage: Closing Disclosures Simplified
You may want to see also
Frequently asked questions
A gift letter for a mortgage is a sworn statement that verifies that the funds being used to purchase a property were a gift and not an undisclosed loan. It is a legally binding document that proves that the money is a gift and does not need to be repaid.
A gift letter should include the donor's basic contact information, the recipient's full name, and the nature of their relationship. It should also include the exact dollar amount of the gift, the date it was transferred, and the source of the gift funds, including the institution name, account name, and account number. Both the donor and the recipient should sign the letter.
A gift letter is useful when you have received a financial gift that you want to use for a down payment on a property. It is a good idea to wait until this money has been in your account for at least two months before applying for a mortgage, as it is then considered "seasoned".
