Why You Need a Gift Letter for Loan or Mortgage Down Payments

May 14, 2021 | 8 Minute read

Why You Need a Gift Letter for Loan or Mortgage Down Payments

Are you planning to use a cash gift as a down payment on your new home? Not so fast!

If you’re taking out a mortgage as well, that cash gift might cause your lender to reject your application. To get around this dilemma, you must prove that the monetary gift is indeed a gift and not a loan.

You need a gift letter.

In this article, we’ll discuss gift letters and why you need to write them. We’ll also cover gift letter guidelines for the most common loan types. In addition, we have included a gift letter template you can use.

What is a Gift Letter for a Mortgage?

If you intend to use a financial gift as part of your down payment on the house, a gift letter is a critical part of a mortgage application. This document states that the person who gave the money to you (the donor) did so freely, with no conditions or expectations of repayment.

When Do You Need a Gift Letter?

One concern that might pop up is, “Do I need to declare all monetary gifts in a gift letter?” Not exactly. As a rule of thumb, most lenders only require that you include “large deposits” exceeding 50% of your total monthly household income.

So if you’re the sole breadwinner and you earn $5,000 a month, you’ll need to include the $2,500 gift you got as a wedding gift. But the $500 from your Aunt Mae? You can skip that.

However, not all lenders follow this rule. For example, government-backed loans define large deposits as anything exceeding 1% of your home’s appraised value or adjusted price, whichever is lower.

But always remember that it’s still the lender who decides which large deposits they want to investigate further. Even if a cash influx doesn’t meet the above criteria, if it is unusually high compared to the rest of your bank statement, the lender might require a gift letter.

Other Gift Letter Considerations

Then, there’s also the issue of who gave you the money. All lenders accept monetary assistance from immediate family and relatives, either by blood or marriage (in-laws, for example). Some, like FHA loans, also allow gifts from close friends or even bosses, but not cousins, nieces, and nephews.

VA and USDA mortgages have the most relaxed rules regarding donors, as they allow gifts from anyone. The only restriction is that the donation cannot come from an interested party, someone who might have vested interests in you buying the home. This includes realtors, lawyers, property developers, and sellers.

We’ll look at the gift letter guidelines for each loan type later. But first, you must be wondering – why do we need to declare a money gift in the first place?

Why Do You Need a Gift Letter for a Mortgage?

You might find it strange that you need to submit a gift letter at all. Shouldn’t the lender not care where you get the funds, as long as you can make your down payment?

It turns out they do need to know where you get your money. Here’s why:

Mortgage lenders weigh your loan application depending on whether they think you can pay them back. To help them decide, lenders make an extensive background check on your assets, bank statements, tax returns, and W-2 forms. They often look at these records over an extended period, sometimes up to six months or more. Their goal is to get a reasonably good idea of your long-term financial stability.

An unusually large amount of cash deposited into your account is a red flag for lenders. Most lenders would assume that it’s a loan, which can increase your debt-to-income (DTI) ratio. With added debt, the lender is taking on more risk because it can become more challenging and unlikely that you can repay your mortgage. As a result, they may reject your application.

When you receive a monetary gift, you often encounter this problem.  The way you solve it is with a gift letter. Mortgage lenders need to know that the cash influx you received was a gift with no repayment obligation.

Aside from this, a gift money letter is good for transparency. It can ensure that the monetary gift complies with any gift tax and money laundering laws, especially if it’s an excessive amount.

However, a gift letter is just one of the many ways lenders verify if your monetary gift is indeed a gift. They can contact your donor directly and ask them for proof to verify the gift transaction came from their pocket and not from another loan.

Gift Letter Template

Writing a gift letter isn’t like writing any other informal letter. You must include specific details before a lender accepts it, like:

  • The gift amount
  • The date when you received (or will receive) the gift
  • Details of the property you intended to buy using the gifted amount
  • Basic information about the donor, including name and contact information
  • The donor’s bank details, including account number and type
  • A clause stating the person who gave you the gift expects no repayment from you
  • Your relationship with the donor
  • Signatures by both you and the donor

Some banks or lenders might need additional information, so be sure to ask them beforehand.

To be safe, most lenders have a standard mortgage gift letter template you can use. Following the template speeds up the letter writing process and ensures that you don’t miss vital information.

You can also use our handy gift letter for a mortgage template below. Just fill in the bolded items in brackets with your own information.

Gift Letter Template

I [DONOR NAME], with address at [DONOR ADDRESS], do hereby certify the following:

  1. I have made a gift of [GIFT AMOUNT] to [RECIPIENT’S NAME], whose relationship with me is a [DONOR/RECIPIENT RELATIONSHIP].
  2. The source of this gift is [DONOR BANK DETAILS].
  3. The money is given freely as a gift with no conditions. No repayment of this gift is expected, either in the form of cash or future services of the recipient.
  4. The gift is to be used toward the purchase of the property with an address at [PROPERTY ADDRESS].
  5. The funds given to the recipient were not made available to the donor from any person or entity with interest in the sale of the property, including the seller, agents, brokers, loan officers, and other associated entities.
  6. We fully understand that making false statements in any document connected with my mortgage application is a crime punishable by fine or imprisonment, as applicable under the provision of Title 18, United States Code, Section 1014 and 1010.

_________________                                _________________

Donor Signature / Date                                  Recipient Signature / Date

Mortgage Gift Letter Guidelines by Loan Type

Different loan types and lending firms will have specific rules on monetary gifts. Some restrict how much of the gift funds you can use for your down payment, while others don’t allow contributions from certain donors. Here are the specifics:

Fannie Mae Loans

Who can give you a gift?

You can only use gift money from immediate family and relatives, whether biological or by marriage. This includes adopted children, domestic partners, and your fiancé (and, by extension, future in-laws).

How much of the gift fund can you use?

You’re required to put a 3% down payment from your own funds if you’re buying a home meant for a single family; you can use gift funds for the remaining balance. For multi-family homes, the minimum is higher at 5%.

Freddie Mac Loans

Who can give you a gift?

Similar to Fannie Mae, you can only use gift funds that come from family members and relatives. However, there’s an exception for money gifted at your wedding. You can use these funds, even if it’s from friends, as long as they’re in your account within 90 days of your wedding day.

How much of the gift fund can you use?

Freddie Mac has no restrictions or minimum contribution requirements when making a down payment. You’re free to use gift funds entirely.

FHA Loans

Who can give you a gift?

This government-backed loan allows you to include gifts from family, relatives, and close friends in your FHA gift letter. In addition, FHA gift letters can also include funds from your employer, non-profit organizations, and government agencies.

How much of the gift fund can you use?

You can use your gift funds to pay for your entire 3.5% down payment without restrictions.

VA and USDA Loans

Who can give you a gift?

You can use gift funds from anyone except interested parties involved in the transaction (sellers, lawyers, builders, and realtors).

How much of the gift fund can you use?

Unlike other mortgages, VA and USDA loans require no down payment. However, should you prefer to make one, you’re free to use gift funds.

Reali Can Help

Navigating gift funds and mortgages can be tricky. Well-meaning financial assistance from a family member can turn into a roadblock. If you need expert advice or guidance, our agents at Reali are ready to help! Talk to us today to learn more about securing a home loan.

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