Affording a home purchase can be challenging. Fortunately, many lenders and loan programs allow you to receive a monetary gift from a close family member or relative to help you buy a home.
The gift typically may be used toward your down payment or closing costs, which tend to be the biggest hurdles to homeownership.
But your lender will require proof that the gift funds are not a loan that needs to be paid back. So if you’re planning to use a gift to qualify, you’ll need to submit a gift letter. We’ll explain everything you need to know about gift rules and how to write and submit a gift letter for a mortgage.
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“A gift letter is a statement written to your mortgage lender clarifying that the gift monies deposited into your account are a gift and not a loan expected to be repaid from the person who gifted it to you,” explained Leonard Ang, CEO of iPropertyManagement. “The borrower and the gift-giver should both sign this letter before sending it to the lender.”
When you apply for a loan, your lender calculates your debt-to-income ratio (DTI) to determine whether you can afford the loan you’re seeking. If the gift were actually a loan, it would affect your DTI and your ability to make your mortgage payments.
If you expect to receive gift money for your mortgage, it’s important to tell your lender as early as possible that you will be receiving those funds and how they will be used. Your lender will tell you what type of documentation is needed for the gift based on the type of loan you’re using.
“A gift letter gives the lender confidence that you are responsible and have the proper documentation to go forward in the process,” Ang added.
“It is very important to get with your loan officer, as every program has different requirements for the documentation needed from the gift donor along with the gift letter,” said Brian Coutu, a loan officer based in Ft. Lauderdale, Fla., with Fairway Independent Mortgage Corporation (Fairway owns Home.com).
“Fairway makes it very easy on our buyers and gift donors. We typically will help them complete the form and send it to the buyer and donor to e-Sign,” Coutu said.
A gift letter for a mortgage should include the following:
- Full name, address, phone number, and email address of the donor and the recipient
- Address of the home being purchased
- Relationship of the donor to the gift recipient
- Monetary amount of the gift funds
- Date when funds were deposited or transferred
- Name of the financial institution or bank where the donor has an account in which the funds were transferred out of
- Copy of Donor’s statement and potentially transaction history reflecting the withdrawal of gift funds out of the account
- Name of the financial institution or bank where the recipient has an account in which the funds were deposited or transferred
- Copy of borrower’s statement and potentially transaction history reflecting the deposit of gift funds into their bank account
- Indication of what the gift funds will be used for
- Donor’s statement that the funds do not need to be repaid
- Signature of the donor and the recipient
Your lender, or the loan program you’re using, may have different rules or requirements that need to be followed when it comes to gift funds and gift letters. That’s why it’s important to ask your lender about the requirements and follow them exactly. If the format or contents of your gift letter are incorrect, your lender may ask you to submit a new one, which means going back to your donor for a second letter. This can slow down the processing of your loan.
“A gift letter should be relatively short and to the point. It needs to be given by the donor and should indicate who they are, their relationship to the borrower, that the funds aren’t borrowed and don’t need to be repaid, and how much they are giving,” said Khari Washington, a Realtor in Riverside, Calif.
Contact your lender, inform them that you will be receiving gift money, and ask if a gift letter from the donor is required and how the letter should be submitted.
Downloadable gift letter for a mortgage template
If you need a gift letter for your mortgage, here’s a template from Lisa Lacey, CEO of Lisa Buys Austin Houses, a Lakeway, Texas-headquartered real estate investment company. You’ll want to modify the contents for your circumstances.
To whom it may concern:
I have gifted funds in the amount of $_____ to _______ (recipient) on ________(date), transferred from my bank, ___________ (name of donor’s bank/financial institution), account number____________, to the account of _____________ (name of recipient) at __________(name of recipient’s bank/financial institution) for the purpose of purchasing a property located at _______________ (address).
This is an unconditional gift that _______ (recipient name) acknowledges will not be repaid to me at any time. This gift is non-transferable and non-refundable. ________(recipient) intends to apply this gift money to ____________(down payment, closing costs, etc.).
Please contact me with any questions or requests. Thank you.
Relationship to borrower:_________________
Current address: _______________
More than half of first-time homebuyers last year got financial help from friends or family that they applied toward their down payment, per a survey conducted by HarrisX for Realtor.com.
That poll also found that more than two in five first-time buyers lacked sufficient funds for a down payment, which is why many received gift funds from loved ones.
Anyone who is purchasing an owner-occupied property, which means they will live in the home, can use gift funds, according to Coutu. He added that gift funds may be used for primary and second homes, but they cannot be used toward investment properties.
Depending on your loan program’s guidelines, you may be able to use a monetary gift toward your down payment, closing costs, or financial reserves.
“Some individuals may choose to utilize gift funds to make the minimum required down payment, while others may use gift monies to make a larger down payment and reduce the size of their loan,” said Lacey.
Every type of loan has different rules and requirements about who exactly is allowed to bestow gift funds, but generally speaking, gifts from relatives, employers, and some non-profits are often allowed. FHA loans even allow you to accept a gift from a friend, if a long-term relationship can be documented.
Usually, eligible gift owners include a domestic partner, betrothed partner, blood relative, adopted relative, or legal guardian, according to Lacey.
“Due to a conflict of interest, a gift fund donor cannot be interested in the transaction – such as a real estate agent, real estate developer, or someone associated with the builder,” she added.
“It is very important to run the gift donor by your loan officer to make sure that the donor is eligible for your loan program,” Coutu said.
Additionally, the money must be given as a true gift, with no expectation of repayment. Otherwise, they are considered a personal loan and would be tallied in your debt-to-income ratio.
Gift money rules by loan program
The rules for giving and documenting gift funds vary based on the type of loan you use to buy your home, which is why you want to get all of the information from your loan officer upfront.
Conventional loans, backed by Fannie Mae and Freddie Mac, as well as FHA loans, typically allow gifts from immediate or extended family members.
That includes your spouse, domestic partner or partner to whom you are engaged, biological/step/foster parent, biological/step/foster/adopted child, biological/step/foster/adopted sibling, grandparent, great-grandparent, uncle or aunt, niece or nephew, cousin, or in-law relative (parents, grandparents, sibling, aunt, uncle).
“Conventional loans are the least complicated – the best way to send the gift funds is to wire the funds directly to the title company and obtain a copy of the wire receipt to match up with the gift letter,” Coutu said. “If the gift funds go into the buyer’s account, we will need to see a copy of the check, transfer, or wire document matching the donor’s name. It would be rare that we would need a copy of the donor’s bank statement for a conventional gift.”
“If the gift funds have been verified in the borrower’s account, [the loan officer will] obtain the donor’s bank statement showing the withdrawal of funds and evidence of the deposit of the same amount to the borrower’s account,” Coutu explained. “If the gift funds are not verified in the borrower’s account, [the loan officer will] obtain the certified check or money order or cashier’s check or wire transfer or official check evidencing payment to the borrower or settlement agent, and the donor’s bank statement evidencing sufficient funds for the amount of the gift.”
“We would need the gift letter plus the donor’s bank statement showing they have sufficient funds to give the gift,” Coutu said of USDA loan gifts. “If the funds have been moved into the borrower’s account, we would need to get a copy of the gift letter plus a certified check, money order, or wire transfer and a bank statement showing the withdrawal from the donor’s account.”
“If the gift funds will be sent directly to the settlement agent, the lender must obtain a gift letter to state the funds do not need to be repaid and verify the funds have been received by the settlement agent by the donor,” he added.
Coutu said the gift rules for VA loans are “pretty simple compared to USDA and FHA.”
You’ll need “evidence of the deposit from the donor, a copy of the check or wire statement matching the donor name, and a copy of the closing disclosure matching the gift amount,” he said.
VA and USDA mortgage loans commonly allow any source (including an employer) to provide a monetary gift, so long as the individual or organization is not an interested party involved directly or indirectly with the transaction.
Gift letter for a mortgage FAQs
A mortgage gift letter should include the name and contact information of the donor and the recipient, as well as details of how and when the funds were transferred. It should also clearly state the recipient is not obligated to repay the gift.
A gift letter is used when a borrower uses gift funds from friends or relatives toward their down payment and/or closing costs. Lenders require a gift letter to verify that the money is in fact a gift and not a loan that must be repaid.
Gifts for a mortgage must be documented, so your lender will want to see transaction records of the money being transferred or deposited into your bank account. You cannot bring gift funds in the form of cash to closing. There must be a paper trail of the gift being made, as well as a gift letter signed by the donor and recipient stating that the money does not have to be repaid.
Your lender may require that, if you are making a down payment of less than 20%, you may use gift funds toward some of your upfront costs, but that a certain percentage comes from your own funds as well.
Again, that’s why it’s best to tell your lender as soon as possible if you plan to use gift funds. You want to make sure you’re following their requirements and process to avoid holding up the processing of your loan.
But the most important rule concerning gift funds is that the donor must agree and put in writing that the gift funds are not required to be paid back. That’s where a gift letter for a mortgage lender comes in handy, to document that agreement.
In addition, gift funds must usually be deposited directly into the recipient’s bank account. This way, the transaction can be easily documented, tracked, and substantiated by the lender. Gift money should not be received and kept at home as paper money by the recipient.
“The most important thing is to communicate with your loan officer when transferring funds for a gift,” Coutu said. “I highly recommend that the donor wire the funds directly to the title company. This is always the path of least resistance and requires the least amount of documentation.”
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.
Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency.