Erin Gobler6-Minute Read
UPDATED: April 17, 2023
Buying a home is an exciting goal, but the down payment can make it challenging for many aspiring homeowners. The good news is that if you have someone in your life generous enough to gift you a sum of money, you can use that money toward your down payment.
If you use a gift for your down payment, your lender is likely to require a gift letter. Keep reading to learn more about when you can use a gift for your down payment, what to include in your gift letter and more.
A gift letter is a written statement for your lender that confirms your down payment funds are a gift and do not have to be repaid. The letter is signed by the donor and provides personal information so the lender can establish where the funds came from and why.
It’s not uncommon for home buyers – especially young, first-time buyers – to receive gifts from family members to help them pay for the down payment and closing costs on a home. These financial gifts can help make homeownership more accessible to young people.
But when you receive a sum of money for your down payment, your lender wants to be very clear on where those funds came from. In fact, you’ll usually have to provide recent bank statements during the mortgage underwriting process so your lender can investigate any large deposits.
The purpose of a gift letter is simply so the lender can ensure you won’t have to repay the money you’ve received for the down payment. Unless you’re working through a special program, a lender would generally disapprove of using borrowed funds to pay for your down payment.
If you’re planning to use gifted funds for your down payment, you’ll typically have to provide a gift letter during the underwriting process. This letter can increase your chances of getting a mortgage since it proves to the lender you haven’t actually borrowed the money.
When crafting a gift letter, you’ll want to include the following information:
To make things easier, we’ve provided a template you can copy and give to your donors to complete. This will ensure your lender has all the details they need to move your loan forward in the home buying process.
Relationship to Recipient:
New Property Address:
Dollar Amount of Donate Gift: $
Date Gift Was Given (Or Will Be Given):
Recipient, will you use (or have you used) a portion of this gift for your earnest money deposit?
Yes or No
By signing this gift letter, both the donor and the recipient confirm that they didn’t 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 a seller, real estate agent, building, mortgage banker or any entity associated with them. The recipient and donor also agree that the gift does not have to be repaid.
Recipient Signature: Date:
Donor Signature: Date:
The rules on how you can utilize gift funds vary depending on the type of mortgage loan you’re applying for. Here’s what you need to know about some of the most popular types of loans:
Just like gift requirements may differ depending on the type of loan you’re borrowing, they may also differ depending on the type of home you’re buying. Here are the rules for different types of properties:
If you’re considering using a gift to make a down payment on a home purchase, it’s important to know all the ins and outs. Keep reading to learn the answers to some of the most frequently asked questions about gift letters.
There’s not necessarily a finite gift amount you can use for the down payment. Instead, you can use gift funds for a certain percentage of the down payment – up to 100%, depending on the type of loan and type of property.
The IRS sets certain tax limits on gifts. In 2023, any gift amount under $17,000 doesn’t have to be reported – an increase from $16,000 in 2022. Each person is entitled to the annual exclusion, but it’s always beneficial to check with a tax professional on your unique situation.
There aren’t necessarily any risks in signing a gift letter as long as you don’t need the funds to be repaid. The only time an issue may arise is if you give the money under the guise of a gift, but actually intend it to be a loan.
In most cases, you’ll need a gift letter if you plan to use gifted funds for your down payment. Lenders look into large deposits into your bank account leading up to your home purchase and want to ensure the funds aren’t actually a loan.
Who can give a gift letter for a mortgage depends on the type of loan. Some loan types require that the gift come from a family member, while others allow the gift to be from anyone except a handful of parties involved in the sale of the home.
There’s a lot you’ll need to get in order during the home buying process. And if someone has gifted you the money for the down payment on your home, a gift letter is one of the many documents you’ll need.
Generally speaking, the earlier you start the process, the smoother it will go. You can start the mortgage application online today to see how much you may qualify for.
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