A gift letter for a mortgage is a document that confirms that a financial gift has been given to a homebuyer by a donor, and it is typically required by mortgage lenders to ensure transparency and compliance with lending regulations. The gift letter serves as a written statement from the donor, verifying that the funds provided are a genuine gift and not a loan that needs to be repaid. Here’s a breakdown of what the letter typically includes.
A financial advisor can help you make a plan to reach your homebuying goals.
When a Gift Letter Is Needed to Get a Mortgage
Purchasing a home can be an overwhelming process, particularly for first-time buyers, and one area that often causes challenges is securing a mortgage. If you are lucky enough to receive a financial gift for your down payment, then you will need to obtain a gift letter.
This is a formal document that verifies the transfer of money from one individual to another with no expectation of repayment. It’s primarily used when a substantial amount of the down payment for a property is being given to the buyer as a gift, and mortgage companies require it to explain those funds. The letter reassures lenders that the funds are a gift and not a loan, which could potentially affect the borrower’s ability to repay the mortgage.
If the gifted funds are mistaken for a loan, it could significantly increase your perceived debt level, negatively influencing your credit assessment. This could lead to less favorable mortgage terms, a higher interest rate or even denial of the loan. The gift letter essentially confirms that the funds are not an additional debt liability.
Example of a Gift Letter
This template can guide you when requesting or writing a gift letter:
Dear [Recipient’s Name],
I am writing this letter to confirm that I am providing a gift to [Homebuyer’s Full Name] to be used as a down payment for the purchase of the property located at [Property Address]. I understand that this gift is to be used solely to secure a mortgage loan for the aforementioned property.
Here are the details of the gift:
Amount of the gift: $[Amount]
Date of the gift: [Date]
Source of funds: [Likely your bank name and account information]
I want to clarify that this gift does not require any repayment. I am providing this gift willingly and without any expectation of repayment or future consideration.
I understand that [Recipient’s Name] may require documentation to verify the source of the down payment, and I am happy to provide any additional information or documentation as needed to facilitate the real estate transaction.
If there are any specific forms or procedures that need to be followed for the acceptance of this gift, please let me know, and I will promptly provide the necessary information.
Please feel free to contact me if you have any questions or require further clarification. I can be reached at [Your Phone Number] or [Your Email Address].
Sincerely,
[Your Full Name]
Keep in mind that you may need to adjust the template to your specific situation, including lender requirements and the donor-homebuyer relationship. Therefore, as a homebuyer, you should consult your mortgage lender or a legal professional to ensure that the gift letter meets all necessary criteria.
What Must Be Included in the Gift Letter
A standard gift letter typically includes several key components. These include:
How to Document Gifted Funds Being Used for a Down Payment
Lenders may require specific documents to confirm the source and use of gifted funds for a down payment. These documents may include withdrawal slips from the donor’s account, deposit slips from the recipient’s account, copies of gift checks and a gift letter. Each of these documents serves a unique purpose in the verification process. For instance, the withdrawal and deposit slips trace the flow of funds, while the gift letter asserts the nature of the transaction.
Awareness of common mistakes made during the documentation of gifted funds can further streamline the process. Some of these common errors include not maintaining a paper trail, co-mingling gifted funds with other personal funds and not securing a gift letter. Each of these can lead to complications in the verification process. To sidestep these issues, it is advisable to keep as much documentation as you have available throughout the process.
Gift Letter Rules to Know
The rules for gift letters can differ depending on the type of loan. For instance, FHA loans require a gift letter that explicitly states the money is a gift and not a loan, authenticated by the donor’s signature. VA loans require a comprehensive explanation of the fund’s origin. USDA loans have similar requirements, but they may also ask for bank statements as gift proof. Freddie Mac loans allow gifts but enforce strict rules about who can be a donor to prevent disguising loans as gifts.
Failure to comply with these rules can lead to serious repercussions. For example, submitting false information on a gift letter could result in your mortgage application being declined. In more serious situations, you could face charges of mortgage fraud, leading to substantial fines or even a jail sentence.
Potential tax consequences are also important to consider. For the donor, the tax consequences can be substantial. As per IRS regulations, gifts above a certain limit within a tax year ($18,000 in 2024) are liable for gift tax, which could reach up to 40%. There’s an essential exception to this rule, though a lifetime exemption limit (currently $13.61 million), which means the donor won’t pay gift tax until the total gifted amount exceeds this limit over their lifetime.
Bottom Line
A gift letter acts as legal proof that the funds received are indeed a gift and not a loan, thereby protecting the rights of the giver and preventing future repayment disputes. The gift letter should be accurate and detailed, including the donor’s name, address, relationship to the borrower, the exact amount of the gift and a clear statement that repayment isn’t expected.
Tips for Real Estate Investing
- A financial advisor can help you create a financial plan to save enough money for a down payment. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- One of the big costs many people forget about when buying real estate is the property tax. You can use a free property tax calculator to help you estimate the average property tax in your area.
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