How to Complete a Gift Letter for a Mortgage Down Payment
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When someone offers to give you money for a down payment on a house, your lender will require a gift letter. The gift letter is a statement from the donor that tells a lender the money is being provided without expectation of repayment.
If you don’t follow the gift letter process correctly, though, you could run into delays or even risk having your loan denied. Here are the ins and outs of how to properly complete a gift letter for a mortgage down payment.
In this article:
- What is a gift letter?
- How much money can you receive as a gift?
- Mortgage down payment gift rules
- How to complete a gift letter
- Are there tax consequences for down payment gifts?
- What is a gift of equity letter?
What is a gift letter?
A gift letter for a mortgage down payment is a written statement that the funds are a gift with no expectation of repayment. The letter must specify who is gifting the money, where the donor’s funds are coming from and explain the relationship between the donor and the borrower.
Mortgage lenders require at least five pieces of information in a gift letter, including:
- The exact dollar amount of the gift
- The date the funds were or will be transferred
- The donor’s signed statement that no repayment is expected
- The donor’s name, address and telephone number
- The donor’s relationship to the borrower
The mortgage gift letter form also identifies the address of the property the gift funds are being applied to, and banking information for the account the donor is using.
How much money can you receive as a gift?
Many home loan programs allow some or all of a down payment gift to come from a variety of sources. You can get gift money from a relative, friend, your employer, local labor union, government agency or even a charitable organization.
The amount of gift funds you can apply to your down payment depends on what loan program you select. Here’s a look at the most common options.
Fannie Mae gift funds. Fannie Mae guidelines allow approved lenders to offer conventional loans, the most common type of home loan taken out in the U.S. The minimum down payment for a conventional loan is 3%, and the entire amount can come from a gift for a one-unit primary residence. A 5% minimum down payment from your own funds is required if you’re buying a two- to four-unit property.
Freddie Mac gift funds. Similar to Fannie Mae, Freddie Mac provides funding for conventional loans. Under Freddie Mac guidelines, your entire down payment can be gifted by a relative if you’re buying a single-family home as your primary residence. You’ll need to come up with up to 3% of your own down payment funds if you’re purchasing a two- to four-unit property with less than 20% down.
FHA gift funds. The Federal Housing Administration (FHA) insures loans made by FHA-approved lenders and allows the entire 3.5% down payment to be gifted. An FHA gift letter paper trail is required, with supporting documents resembling conventional guidelines. FHA loans, which have lower credit score requirements and a low down payment requirement, can help first-time homebuyers who need more flexible borrowing guidelines.
VA gift funds. The Department of Veterans Affairs (VA) guarantees home loans for eligible active and retired military borrowers. VA loans do not require a down payment, but the program does allow borrowers to use gift funds toward a down payment if they want to make one. The gift letter and documentation requirements are similar to FHA and conventional loans.
USDA gift funds. Families with low- to moderate-incomes can purchase homes in rural areas of the U.S. using the U.S. Department of Agriculture’s mortgage program. Like the VA loan program, USDA loans require no money down. Gift funds are permitted with a properly completed down payment gift letter and supporting documents consistent with FHA, VA and conventional lending rules for gift letters.
Mortgage down payment gift rules
It’s very important to follow the rules when it comes to using gift funds for a down payment. Your gift letter has to be backed up with documentation. Here are some key rules about mortgage down payment gifts.
Paper trail tracing the funds from the donor to you. If you haven’t received the gift money yet, your lender will need documentation (bank statements, for example) showing the funds being deposited into your bank account. Below are the documents that lenders will usually need to approve gift funds for a down payment.
- A copy of the gift check and deposit slip showing funds deposited into your account.
- Copy of the withdrawal slip showing the funds leaving the donor’s account.
- A copy of a check made out directly to the closing agent. It’s best to add the escrow number of the transaction to the check so the funds are directed into the escrow account tied to your purchase — you can get this information from the closing agent.
- A copy of the settlement statement showing funds deposited or wired into the escrow account for your purchase.
No repayment terms. A gift is a gift, and anything indicating the money is to be paid back won’t be acceptable. If you use a standard mortgage gift letter template, the language will already include a statement indicating no repayment is expected.
Your relationship to the gift donor. Conventional lending guidelines allow gift funds only from a close relative or friend. In some cases, the lender may require proof of your relationship. Below is a list of acceptable relationship types for gifting:
- Child or other dependents
- Any individual related by blood, marriage, adoption or legal guardianship
- A fiancé/fiancée or a domestic partner
Interested parties may not gift down payment money. Your real estate agent, home builder and the seller are prohibited from gifting you money toward a down payment.
Gifts are not permitted on investment properties. Gifts are allowed to be used for buying a primary residence or second home, but not an investment property. All of the funds for investment purchases must come from your own money.
The source of the funds must be fully documented. Besides providing banking information, the donor must provide proof the money was already in the account the gift funds are coming from, which entails providing a bank or investment statement. Have a frank conversation with a potential gift donor to ensure they’re comfortable providing their financial information to your lender. If they don’t provide documentation and you can’t come up with the down payment funds, your lender may not approve your loan without it.
How to complete a gift letter
Lenders generally have boilerplate gift letters for you to use. The graphic below is a typical gift letter example, along with basic instructions for filling it out and what the fine print means.
Are there tax consequences for giving down payment gifts?
The IRS taxes gifts made over a certain dollar amount. As of 2019, you can gift up to $15,000 per person without any tax penalty. In most cases, the donor has to pay the gift tax, but there may be special cases when the person receiving the gift can agree to pay the tax instead. Check with your accounting professional to determine if this is an option for you.
What is a gift of equity letter?
Families wanting to pass down a home to future generations can accomplish that goal with a gift of equity. A gift of equity letter allows a seller to gift a portion of the equity they have in a home they own to a buyer who is a family member, fiancé/fiancée or a domestic partner who is purchasing that home. Home equity is the difference between a home’s value and the loan balance, and some loan programs permit equity to be gifted to family members instead of gifting cash.
The gift represents the amount of equity the seller is willing to give to the family member buying their home. The documentation requirements that accompany a gift of equity letter are similar to what is needed with a regular gift letter, except there is no exchange of funds.
Fannie Mae’s gift of equity guidelines allow for gifts of equity as long as they are made to a relative, fiancé/fiancée or domestic partner. FHA also allows for gifts of equity, as long as the sale is between family members. USDA loans require a gift of equity to be applied as a reduction in the price of the home, while the VA does not allow them at all.