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Using A Gift Letter For A Mortgage: A How-To Guide

Carla Ayers6-Minute Read
November 10, 2021

For some, buying a home is a family affair. Becoming a homeowner is a huge milestone and family will want to help in that process. If you’re planning to use a gift for a down payment or you plan to gift someone a substantial amount of money for their home purchase, here's what you need to know.

What Is A Gift Letter?

A gift letter for a mortgage is written proof that a borrower was given funds in the form of a gift with no expectation of the money being paid back. A gift letter for a mortgage provides all the information lenders will need to establish where the funds came from and why.

If you’ve received a cash gift or you plan to use one for a down payment, be prepared to give your lender a gift letter disclosing the source of the new funds. Any large deposits on your recent bank statements could be pulled into question during the loan application process. Lenders don’t like when borrowers use additional borrowed funds to pay for a down payment; however, a gift is acceptable.

How Does A Gift Letter Work?

Typically, lenders provide a preferred form to loan applicants who plan to use a gift to pay for their down payment. The standard gift letter contains the following information:

  • Donor information:
    • Donor’s name, address and phone number
    • Donor’s relationship to the borrower
  • Borrower information:
    • Borrower’s name
    • Address of the property the borrower will be purchasing
  • Gift information:
    • Dollar amount of the gift
    • Date the funds were or will be transferred to the borrower
    • Intended use of the gift
    • Donor’s signed statement that no repayment is expected
    • Borrower’s signature

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Gift Letter Template

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.

 

Gift Letter

Donor Information

Name:

Address:

Phone:

Relationship to Recipient:

 

Recipient Information

Name:

New Property Address:

 

Gift Information

Dollar Amount of the Donated Gift: $

Date Gift was or will be given (Month, Date, Year):

 

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 the donor also agree that the gift does not have to be repaid.

 

Recipient Signature:                                                             Date:

 

Donor Signature:                                                                   Date:

Who Can Gift Money For A Mortgage Down Payment?

The type of loan a borrower is intending to get will dictate who can and cannot donate gift money for a home down payment. We’ll discuss a few types of loans and who’s eligible to gift you funds for a down payment.

Conventional Loans

Because conventional loans are backed by the government, Fannie Mae and Freddie Mac determine the rules regarding who can donate gifts for this type of mortgage. Their regulations stipulate that gifts must be made by a family member. Acceptable familial relationships include:

  • Spouse (including domestic partner and fiancé(e))
  • Parent
  • Grandparent
  • Aunt/uncle
  • Sibling
  • In-laws (Fannie Mae will also accept future in-laws)
  • Cousin
  • Child
  • Niece/nephew
  • Grandchild
  • Godparents (Fannie Mae only)
  • Relatives of your domestic partner (Fannie Mae only)
  • Former relatives (Fannie Mae only) 

Family members who fall into the following categories may also be permitted: step-, foster, great- or adopted relatives.

FHA Loans

When obtaining an FHA loan, the borrower may use gifts from family members and other specific categories of individuals who have demonstrated a clear interest in the borrower’s life. Although most family members qualify as acceptable donors, you’ll notice that cousins, nieces and nephews may only be eligible if they display a clear interest in the borrower. Permitted donors include:

  • Family members:
    • Spouse (including domestic partner)
    • Parent (including step- and foster)
    • Grandparent (including step- and foster)
    • Aunt/uncle
    • Sibling (including step- and foster)
    • In-laws (including mother, father, daughter, son, sister and brother)
    • Child (including step-, foster and adopted)
    • Grandchild (including great- and step-)

Other invested individuals:

  • Borrower’s employer
  • Borrower’s labor union
  • Government agency or public entity that provides financial assistance to first-time home buyers
  • Charitable organization that provides financial assistance
  • Close friend with a clearly defined interest in the borrower (including ex-spouses and extended family, such as a cousin, niece/nephew, foster sibling)

USDA And VA Loans

VA loans and USDA loans are the least restrictive when it comes to who can donate cash gifts to borrowers. Instead of having a list of acceptable donors, these entities merely restrict gifts from the following types of individuals:

  • The seller of the subject property
  • The builder or contractor of the subject property
  • The developer of the subject property
  • The buyer’s agent or listing agent of the subject property

Rules For Using Gift Money As A Down Payment

There are rules and guidelines regarding how a borrower can use gifts for their down payment. The rules differ depending on the type of property being purchased.

Primary Residences

If you’re purchasing a primary residence, you can use a cash gift to pay for your down payment. However, there are certain stipulations to this rule:

  • For single-family units: The gift can finance 100% of your down payment.
  • For multifamily units: The gift can finance 100% of your down payment, assuming you put at least 20% down. If you plan to make a down payment of less than 20%, you must contribute at least 5% of the funds yourself.

The borrower may also use the gift received toward their earnest money deposit and/or closing costs.

Second Homes

If you’re purchasing a second home, you can use a gift to fund your down payment only if you plan to obtain a conventional loan. You will not be able to get an FHA, VA or USDA loan.

Unlike with primary residences, you may not use a cash gift to purchase a multifamily unit. Furthermore, when using a gift to buy a single-family, second home, you must contribute at least 5% of the down payment if you intend to put less than 20% down.

Investment Properties

If you’re planning to purchase an investment property, you may not use any gift funds.

Does A Mortgage Gift Letter Get Reported To The IRS?

You usually aren’t responsible for paying any tax on the money you receive because you’re the person receiving the gift. However, the person who gave you the gift might have to. Let your donor know their gift may be subject to tax. A tax professional can advise all parties on best practices when gifting.

The annual gift exclusion is $15,000, which means your donor doesn’t need to report anything if they give you less than $15,000. They’ll need to file a gift tax return if they give you more than that amount.

A gift tax return discloses to the government the amount they’ve given to you. Filing a gift tax return doesn’t mean the donor automatically has to pay anything. It just deducts the current gift from their lifetime gift tax exclusion, which dictates how much a person can give throughout their life.

Keep in mind that tax laws change frequently. Speak with a tax adviser to make sure you have a good understanding of the current laws. 

The Bottom Line

Many home buyers have found it possible to make their dreams of owning a home a reality thanks to the generosity of family members.

However, if you receive a gift to help you buy a home, make sure you report it through a gift letter. The easiest way to do so is to fill out the gift letter template included in this article. If you have any questions, be sure to ask your mortgage lender. They’ll be happy to help you through the process.

If you want to learn more about becoming a homeowner, speak to a Home Loan Expert today.

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Carla Ayers

Carla is a freelance writer and Realtor with a background in marketing, communications and property management. She attended Eastern Michigan University where she received a Bachelors in Arts Marketing and a Masters in Integrated Marketing & Communications.