If you are thinking about buying a home, you should consider how much money you will have for a down payment. A down payment is one of the highest up-front costs to purchasing a home. Many people, especially first-time homebuyers, rely on gift letters for a mortgage to help them purchase their dream home.
A mortgage gift letter supplies documentation for the money you received to assist in purchasing a home. It shows the lender that the funds are a gift and that you are not required to repay them.
Depending on your loan program and transaction, you may apply gift funds toward a down payment or other expenses associated with buying a home. Lenders are required to confirm the origin of these funds. Therefore, you will usually have to submit extra documentation together with the gift letter.
We outline the rules and guidelines when using a gift letter for a mortgage down payment.
What is a Gift Letter?
A mortgage gift letter is a document created by the individual who supplies the money. This individual is referred to as the donor. The letter indicates the gift amount and describes the relationship between the donor and the borrower. It also verifies that the borrower is not required to repay the money.
The mortgage gift letter enables the lender to verify that the funds are a gift. This document demonstrates that the borrower has not incurred additional debt to purchase the property.
Different loan programs impose varying requirements. Consult your lender to determine which formats and supporting documents are required before you transfer any money.
What Information Should a Down Payment Gift Letter Include?
If you need guidance on writing a gift letter for a mortgage application, begin by clearly naming the borrower, the donor, the gifted amount, and the donor’s relationship to the borrower. The letter must also state that the money is a gift and does not require repayment.
The mortgage gift letter will state the following information:
- The borrower’s name
- The donor’s name and contact information
- The dollar amount of the gift
- Your relationship to the donor (i.e., daughter, cousin, friend)
- A statement explaining that the borrower will not repay the gift funds
- The address of the property being bought by the borrower
- The date the funds were transferred or will be transferred
- A statement describing where the gift money comes from (an investment account, checking account, savings account, etc.)
- The donor’s signature
Lenders might supply their own gift letter forms. Depending on your specific mortgage, you may need to provide additional information.
Template and Example for a Mortgage Gift Letter
The text below illustrates the typical structure of a mortgage gift letter. You should use the form or wording required by your lender rather than assuming this template fits every loan program.
Your lender may request additional information or signatures.
What are the Mortgage Down Payment Gift Rules?
The rules for mortgage gift funds depend on the loan program, property, occupancy type, and details of the transaction. Confirm that both the donor and the funds meet your mortgage requirements before the money is transferred.
The donor must be eligible under the loan program
Who can provide gift funds varies by mortgage program. Family members are commonly eligible donors. Some programs may also permit gifts from other individuals or organizations that meet their requirements.
Your relationship with the donor alone does not determine eligibility. Have the lender confirm that the donor qualifies before accepting the funds.
Gift funds generally cannot come from an interested party
Mortgage programs place restrictions on funds provided by people or businesses with a financial interest in the transaction, such as a builder, developer, or real estate professional.
Because exceptions and requirements can vary by program, the lender should review the source before the gift is transferred.
The amount you can use depends on the loan
There is no single gift limit that applies to every mortgage. Some transactions may allow gift funds to cover the full down payment, while others can require the borrower to contribute some of their own money.
Property and occupancy type matter as well. Certain programs may not permit gift funds for an investment property.
Your lender can determine how much of the money needed for your transaction may come from a gift.
The gift cannot be a loan
The donor cannot expect the borrower to repay funds that are being documented as a mortgage gift.
If there is an agreement to repay the money, even an informal one, it should not be represented to the lender as a gift.
You need a paper trail for the funds
The gift letter is only part of the documentation. The lender may also need to verify where the money came from and how it reached the borrower.
Depending on the loan program and how the funds are transferred, documentation could include account statements, checks, deposit records, electronic transfer records, or closing documents.
This allows the mortgage underwriter to confirm that the funds match the information provided in the gift letter.
Contact us to learn more about how gift limits vary by loan program.
What if I am Unable to Get a Gift Letter for a Mortgage?
You do not need gift funds to purchase a home. If a gift is not available, you can create a down payment savings plan based on your budget and expected purchase timeline.
You may also qualify for a mortgage with a lower down payment requirement. GuardHill offers government loan programs and other financing options with different down payment requirements.
Frequently Asked Questions
Can Parents Give Gift Money for a Mortgage
Parents can commonly provide mortgage gift funds if they meet the donor requirements for the applicable loan program.
The gift still needs to be properly documented. A gift from a parent generally requires a gift letter and any supporting records requested by the lender.
Are FHA Gift Letter Requirements Different?
Yes. FHA and conventional mortgages can have different requirements for eligible donors and documentation.
If you are using an FHA or another government-backed mortgage, the gift must follow the rules for that particular program. Your lender can tell you which documents are required for your loan.
Can Gift Money Be Used for Earnest Money?
Gift funds may be eligible to cover earnest money depending on the mortgage program and transaction.
If your earnest money came from a gift, tell your lender so the source and transfer can be documented correctly.