How To Use Gift Letters for a Mortgage

A Homebuyer’s Guide to Mortgage Gift Letters

According to the National Association of Realtors, about a quarter of all buyers purchasing a new home receive money as a gift to use as a down payment. Using gifted money for a down payment is allowed for almost all mortgages, but you will typically need a mortgage gift letter.

The purpose of the mortgage gift letter is to provide your mortgage lender with details about the source of the money, to verify you meet the guidelines of the type of mortgage you apply for.

This guide will explain what a mortgage gift letter is and will include a sample gift letter form for mortgage borrowers (so you can prepare a letter if you need one).

What Is a Mortgage Gift Letter?

If you receive a financial gift to use as a down payment when purchasing a home, your lender will likely require a mortgage gift letter. The purpose of the letter is to confirm that the money is a gift and not a loan. This is necessary because lenders aren’t allowed to let you take on debt to cover mortgage costs.

A mortgage gift letter also provides information about where the money came from, as lenders are required to know the source of all funds used to buy a home. Mortgage guidelines require that all money used to qualify for a mortgage comes from a legitimate source.

How Do Gift Letters for Mortgages Work?

A mortgage gift letter must provide the information lenders need to confirm that you are not borrowing additional money. This is important to confirm that you don't borrow more than the lender's allowable loan-to-value ratio. The letter also must provide the information that lenders need to feel confident that the money is a legitimate gift.

Your lender may provide a mortgage gift letter form that you must complete. The form or template they provide will show you exactly what information you need. In general, however, the letter should:

• Clearly state that the money provided is a gift and that no repayment is necessary.
• Provide details on who is giving the gift (the donor), including the donor's contact information.
• Provide information on the relationship of the donor to the home buyer.
• State the amount of the gift.
• Include the address of the property.

Lenders need this information to protect their interests and ensure you aren't giving the donor an ownership stake in the home or making another financial commitment that could affect your ability to make your mortgage payment.

Mortgage Gift Letter Requirements

A letter of gift for mortgage is required for any type of mortgage loan when you are using gifted money to cover a down payment or closing costs. However, the specifics of how to write a gift letter for mortgage (and what it must include) can vary by loan type.

Mortgage Gift Letters for Different Loan Types

Here are the most common loan types, along with details about the mortgage gift letter form and requirements for each one.

• Conventional loan: A conventional loan isn't guaranteed by the government, so lenders may set their own requirements. However, if your loan is backed by Freddie Mac or Fannie Mae (most conventional loans are), it must conform to their guidelines. The conforming rules allow you to get up to 100% of your down payment from a gift, but your gift letter must provide donor details, the amount you're being gifted, and a note that the gift isn't a loan.
• FHA loan: FHA loans must have a minimum 3.5% down payment, and the whole amount can be gifted. The gift letter must state the gift amount, the donor's contact details, the donor's relationship to the borrower, and that there's no expectation of payback. Supporting documents, such as a copy of a canceled check from the donor and a deposit slip from the recipient should be included.
• VA loan: VA loans, or loans backed by the U.S. Department of Veterans Affairs, don't require down payments. However, you can still use gifted funds if you want to put down money on the home or to cover closing costs. The requirements for the gift letter for mortgage loans from the VA are the same as those for conventional and FHA loans.

Mortgage Gift Letters for Different Property Types

Here are the rules that apply for the letter of gift mortgage lenders require when you're using conventional loans to buy specific kinds of properties:

• Primary homes: When you are buying a single-family primary home, the entirety of your down payment can come from gifted funds, provided your mortgage gift letter includes the amount of the gift, contact details of the donor, and the property address.
• Secondary homes: Buying a second home comes with slightly different rules. If you make at least a 20% down payment, all of the down payment money can come from a gift. The details required in the gift letter must be the same as for other types of loans.
• Investment properties: Gift funds can't be used for a down payment on investment real estate or income-producing real estate, so no mortgage gift letter will be accepted.

What Do Lenders Do with a Mortgage Gift Letter?

Lenders review mortgage gift letters to confirm that the funds are a gift. The purpose is to make sure a borrower isn't taking on additional debt. Lenders may also ask for additional information including bank statements from the donor and recipient. These documents are reviewed in underwriting when lenders evaluate the risk of issuing the loan.

Mortgage Gift Letter Template

Your lender may have its own specific mortgage gift letter form. However, in some cases, you are just told to provide the required documentation. This mortgage gift letter template will help you to see what your letter should look like.

[Date]

To Whom It May Concern:

I, [Donor’s Name], am giving [Your Name/Names] the amount of [Gift Amount] as a gift to be used for the purchase of a home at [Address].

I declare that this money is a gift, and that no repayment is required or expected. I am making this gift solely for the purpose of assisting [Your Name/Names] in purchasing a home.

I certify I am the legal owner of these funds and have the legal right to give them to [Your Name/Names]. This money does not come from a loan.

I also certify that there are no conditions or obligations attached to this gift, and that it is non-refundable, non-transferable, and no interest is payable.

I have no ownership or interest in any property that may result from the use of these gift funds.

My relationship to [Your Name/Names] is [state relationship]. These funds come from our [account type] with [Name Institution].

[Your Name/Names] intend(s) to use this gift for the purchase of a home, and the funds will be used exclusively for the down payment or closing costs of the home.

Sincerely,

[Donor’s Name]

[Donor’s Address]

[Donor’s phone number]

Mortgage Gift Letter FAQs

Still need to know more about mortgage gift letters? Here are some answers to common questions you may have.

Who Can Provide Gift Funds to Purchase a House?

In general, family members, close friends, and employers or organizations offering mortgage assistance programs can all provide gifted funds for home down payments.

However, required documentation may vary based on loan type and the source of the gifted funds. For example, if the money comes from a close friend, lenders may require a documented family-like relationship. Your lender will explain the requirements and limitations on gifted down payment money.

What Is the Maximum Mortgage Gift?

There is no maximum mortgage gift. However, some mortgages require borrowers to put at least some personal funds into a transaction. Your lender will provide the specific requirements of how much money you must provide and how much can come from a gift, depending on the mortgage option you choose.

Do You Have to Pay Taxes on Gift Money?

No, you generally don’t need to pay taxes on any money you receive as a gift. The person giving you the money may be required to pay taxes on it, depending on how much they give and when they give it. If you’re considering using a gift from a family member to help you buy a home, it’s recommended to consult a tax professional to better understand the taxes you may need to pay.

What Counts as a Gift for a Mortgage?

Acceptable gifts for a mortgage include money provided to cover down payments and closing costs that don’t have to be paid back. Examples include money provided by a family member or very close friends, or down payment assistance provided by a labor union, employer, charitable organization, or government agency.

Final Thoughts: What to Know about Mortgage Gift Letters

If you are buying a home, receiving a gift to help you cover the down payment or closing costs can make your transaction more affordable. However, you'll need to make sure the gift is documented properly, including with a mortgage gift letter that's acceptable to your lender. Find out what the requirements are for gift letters, so you can get your documents well-prepared to avoid delays.

To learn more about the homebuying process, how using gifts works, and what type of mortgage loan is available to you, reach out to an experienced Freedom Mortgage loan professional to get prequalified for a mortgage. Get started on your home-buying journey today!