When you’re buying a home, especially as a first-time homebuyer, every bit of help counts. If you’re fortunate enough to receive gift funds from a family member or a close friend to assist with your down payment or closing costs, that’s fantastic news! However, mortgage lenders need to ensure these funds are genuinely a gift, not a disguised loan. This is where a gift letter for a home loan comes into play.
This comprehensive guide will walk you through everything you need to know about gift letters for mortgages. We’ll explain what they are, why they’re necessary, how to write one, and the specific rules to follow to ensure a smooth loan approval process. We’ll also provide a downloadable gift letter template to make things easier for you. Understanding these guidelines is crucial to avoid any hiccups that could delay your mortgage or, in the worst-case scenario, jeopardize your home financing.
Understanding the Mortgage Gift Letter
A gift letter, specifically for mortgage purposes, is a formal document that confirms that the money provided to you for your home purchase is indeed a gift and not a loan. Lenders require this letter to verify that you are not taking on additional debt that needs to be repaid, which could impact your ability to manage your mortgage payments.
The gift letter must clearly state:
- The donor’s name and contact information.
- The donor’s relationship to the recipient (borrower).
- The exact amount of the gift.
- A statement confirming that the funds are a gift and no repayment is expected.
- The source of the funds.
- The property address for which the funds are intended.
- The date of the letter.
- Signatures from both the donor and the recipient.
Gift funds are commonly used for:
- Down payment
- Closing costs
Gift funds generally cannot be used for:
- Mortgage reserves (in some loan programs like FHA and VA)
Leveraging Gift Funds for Investment Properties with Government-Backed Loans
While conventional loans typically restrict the use of gift funds for investment properties, government-backed loans offer more flexibility. If you’re considering purchasing a two- to four-unit property and plan to house hack—living in one unit as your primary residence and renting out the others—you can utilize gift funds for the down payment with government loan programs. A key condition is that you must reside in one of the units as your primary residence for at least 12 months.
For those interested in exploring financing options for investment properties, it’s worth investigating investment property loan rates.
Gift Letter Template for Mortgage
To simplify the process, we’ve provided a mortgage gift letter template that you can use. Feel free to download and share this template with your gift donor. They can review, fill out, and sign it.
Download our Gift Letter Templates:
Gift letter for mortgage template (PDF)
Gift letter for mortgage example (PNG)
Why Mortgage Lenders Require Gift Letters
Lenders meticulously review gift letters for a few critical reasons:
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To Confirm the Donor’s Disinterest in the Property: Lenders need to ensure that the person gifting the money isn’t involved in the property transaction in a way that could create a conflict of interest. This means the donor cannot be the seller, builder, real estate agent, or anyone with a financial stake in the home sale. Typically, donors are family members or close partners. However, there might be exceptions if a family member is also the seller, which would need to be clarified with the lender.
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To Accurately Calculate Your Debt-to-Income Ratio (DTI): Your debt-to-income ratio is a key factor in mortgage approval. Gifted funds are not considered debt, which positively impacts your DTI. Conversely, borrowed funds would increase your debt burden and negatively affect your DTI. Lenders use gift letters to correctly assess your financial situation.
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For IRS Tax Compliance: The IRS has regulations regarding gifts, and lenders need to be aware of these for compliance. In the U.S., the donor, not the recipient, is responsible for any potential taxes associated with the gift. For instance, in 2024, an individual can gift up to $18,000 without incurring a tax penalty. This amount is set to increase to $19,000 in 2025. While gift letters themselves aren’t directly sent to the IRS by lenders, they form part of the overall financial documentation for the mortgage, which could be subject to audit or review.
Let’s delve deeper into the eight essential pieces of information required in a gift letter and why lenders request each one:
1. Precise Gift Amount
Lenders verify that the gift amount stated in the letter matches the funds transferred from the donor’s account to your account. This ensures transparency and accuracy. The IRS also monitors gift amounts annually to enforce tax regulations on large gifts.
2. Donor’s Statement of Non-Repayment
This is a crucial element, explicitly stating that the money is a genuine gift and that the borrower is not obligated to repay it. This reassurance is vital for lenders to classify the funds correctly and assess the borrower’s true debt obligations.
3. Property Address
Specifying the property address in the gift letter directly links the gifted funds to the specific home purchase. This prevents the funds from being ambiguously used and provides a clear context for the transaction.
4. Donor’s Financial Account Details
This includes the donor’s bank or investment firm name, account number, and account type (checking, savings, or investment). Underwriters meticulously review this information to confirm that the funds are not originating from a party with a vested interest in the property sale, such as a real estate agent or the seller. Transparency here is key to the acceptability of gift funds.
5. Date of Fund Transfer
The gift letter should indicate when the funds were or will be transferred. Funds can be deposited into your account or directly into the purchase escrow account. Knowing the transfer date helps lenders track the flow of funds and ensure they are available when needed for closing.
6. Donor-Borrower Relationship
Most loan programs stipulate that gift funds must originate from a relative or friend. Gifts from parties involved in the transaction, like your loan officer, real estate agent, or the builder, are generally not permitted. This condition is in place to prevent conflicts of interest and ensure the integrity of the home buying process.
7. Donor’s Complete Contact Information
The donor must provide their full name, address, and telephone number. Lenders require this for verification purposes and to maintain a clear record of all parties involved in the financial aspects of the mortgage. Donors need to be comfortable sharing this information.
8. Dated Signatures
Both the donor and the borrower must sign and date the gift letter. Once signed, it becomes a legally significant document, affirming the intent and details of the gift.
Important Reminder: Treat Gift Letters Seriously
Most gift letter templates include a “fraud notice.” This notice emphasizes the legal ramifications of making false statements. If the funds are not genuinely a gift but are misrepresented as such on the gift letter, you could face accusations of mortgage fraud. It’s crucial to ensure complete honesty and accuracy when completing a gift letter.
Documenting Gift Funds for Your Mortgage
Beyond the gift letter, you’ll need to provide documentation to substantiate the source of the gifted funds. The required documents vary based on how the funds are transferred:
For Checks:
- A copy of the gift check and the deposit slip confirming the funds deposited into your account.
- Documentation showing the funds leaving the donor’s account, such as a withdrawal slip or bank statement.
- Alternatively, a copy of the check made out directly to the closing agent. (Ensure the transaction escrow number is included on the check for proper allocation to your purchase escrow account. Obtain this number from your closing agent.)
For Electronic Transfers:
- Evidence of the electronic transfer, such as an electronic transfer confirmation statement.
For Wire Transfers:
- The settlement statement showing the funds wired into the escrow account.
Key Rules Regarding Gifted Funds for Mortgages
Most loan programs permit the use of gift funds, but the specifics, such as the permissible amount and acceptable donor sources, can vary depending on the loan type. Generally, acceptable sources for gift funds include relatives, friends, employers, labor unions, government agencies, and charitable organizations.
Let’s review the gift fund guidelines for several common mortgage programs:
Fannie Mae Gift Guidelines
Conventional loans, the most prevalent type of home loan, often adhere to Fannie Mae guidelines. For a single-family home purchase, the entire down payment for a conventional loan can come from gift funds, provided you contribute at least 3% of the purchase price from your own funds.
Gift funds under Fannie Mae guidelines can be sourced from relatives, employers, long-term close friends, government Down Payment Assistance (DPA) programs, or charitable entities.
Freddie Mac Gift Guidelines
Similar to Fannie Mae, Freddie Mac also backs conventional loans. Freddie Mac guidelines allow for the entire down payment to be gifted by a relative when purchasing a single-family home as a primary residence. Additionally, Freddie Mac permits the use of wedding gift funds from relatives and friends, subject to two conditions:
- Providing a copy of your marriage license.
- Demonstrating that the funds were deposited into your bank account within 90 days of your marriage license date.
FHA Gift Guidelines
The Federal Housing Administration (FHA) insures loans offered by FHA-approved lenders. FHA loans typically require a minimum 3.5% down payment, which can be entirely gifted. An FHA gift letter is mandatory, and the required supporting documentation is similar to conventional loan guidelines. FHA loans are popular among first-time homebuyers, partly because they allow for a lower minimum credit score (580) compared to conventional loans (620 minimum).
Explore FHA loan rates.
VA Gift Guidelines
The U.S. Department of Veterans Affairs (VA) guarantees home loans for eligible military personnel and veterans. VA loans generally do not require a down payment. However, VA guidelines permit borrowers to use gift funds towards closing costs or even a down payment if they choose to make one. The gift letter and documentation requirements are comparable to those for FHA and conventional loans.
Explore VA loan rates.
USDA Gift Guidelines
The U.S. Department of Agriculture (USDA) guarantees no-down-payment USDA loans for eligible low- to moderate-income families in designated rural areas. Similar to VA loans, gift funds can be applied to closing costs. A gift letter and supporting documents, consistent with the rules of other loan programs, will be necessary.
Government-Backed Mortgages and Gift Funds for Mortgage Reserves
Mortgage reserves are funds set aside to cover several months of mortgage payments in case of financial emergencies. Conventional lenders may allow gift funds to be used for reserves, if needed. However, FHA and VA loans typically do not permit gift funds to be used for mortgage reserves, necessitating borrowers to use their own savings for this purpose.
Understanding the Gift of Equity Letter
Home equity represents the difference between a home’s market value and the outstanding mortgage balance. A gift of equity is a scenario where a seller gifts a portion of their home equity to a buyer who is a family member, fiancé(e), or domestic partner. In such cases, a gift of equity letter is required instead of a standard gift letter.
Key aspects of a gift of equity:
- The gift is the amount of equity the seller is gifting to the buyer (relative).
- Documentation requirements are similar to a regular gift letter.
- No actual money changes hands.
- The gifted equity is credited to the buyer at closing, effectively reducing the purchase price and potentially the down payment needed.
Equity Gift Rules by Loan Type
- Fannie Mae and Freddie Mac: Gifts of equity are limited to relatives, fiancés(es), or domestic partners.
- FHA: Gifts of equity are permitted only for home sales between family members.
- VA: VA guidelines do not explicitly address gifts of equity. Consult with your loan officer or lender to determine if a gift of equity is applicable to your VA loan.
- USDA: Any gift of equity must result in a reduction of the home’s purchase price.
By understanding the nuances of gift letters and gift funds for home loans, you can navigate the home buying process more confidently and ensure a smoother path to homeownership. Remember to consult with your lender for specific guidelines related to your loan type and circumstances.
