If you are thinking about buying a home, you should start considering how much money you will have for a down payment. A down payment is one of the highest up-front costs to buying a home. Many people, especially first-time homebuyers, rely on gift letters for a mortgage to help them purchase their dream home. We outline the rules and guidelines a borrower must follow when using gift funds for a down payment.
What is a Gift Letter for a Mortgage?
A gift letter accompanies a cash gift you receive that is to be used towards the down payment. The gift letter states that you (the borrower) do not have to pay back the donor’s money. The letter helps the mortgage company understand clearly that the funds are a gift, not a loan.
A gift letter for a mortgage will also include the following information:
- Your name and the donor’s name
- 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 property address
- A statement describing where the gift money is coming from (an investment account, checking account, savings account, etc.)
- The donor may also be required to provide proof of the transfer of funds (copy of a recent bank statement or evidence that the funds went from one account to another)
- The donor’s signature
Sample Gift Letter
Mortgage Down Payment Gift Rules: How to Use a Gift Letter When Applying for a Mortgage
- The mortgage company must approve who is gifting the funds.
- The gifted amount must be in line with the lender’s guidelines.
- You may not pay back the gifted amount to the donor.
- The gift recipient and donor must be able to provide a paper trail and record of where the money is coming from and going.
- Throughout the mortgage process, the underwriter will re-review your bank accounts to ensure that all the funds used to qualify you for the loan is, in fact, your money. If there are any discrepancies, you may be required to provide a letter of explanation.
Who Can Gift Funds for a Down Payment?
Typically, the gift must come from a relative or close friend. However, some mortgage companies may only allow a mortgage down payment gift from blood relatives. Other companies may allow gifts from godparents or close friends.
Who Can Not Gift Money?
In most cases, anyone who has a vested interest in the home is not eligible to gift money for a down payment. This may include the seller, general contractor, or real estate agent.
How Much Can be Gifted?
The giftable amount depends on the loan program and the mortgage company’s guidelines. In most cases, you may receive a gift that covers the total cost of the down payment. For example, if you are purchasing a home for $100,000 and your down payment is 20%, you may be eligible to receive a gift of up to $20,000.
Contact us to learn more about how gift limits vary by loan program.
Can you Pay Back a Mortgage Down Payment Gift?
As mentioned above, you can not pay back a mortgage down payment gift. Paying back the funds would qualify that money as a loan, not a gift, which should have then been taken into consideration when calculating your debt-to-income ratio and qualifying you for the loan.
If you have any questions about getting a gift letter for a mortgage, get in touch with one of our mortgage specialists.
What if I am Unable to Get a Gift Letter for a Mortgage?
If you want to buy a home but do not have any friends or family members who can provide a gift letter for a mortgage, you should start focusing on creating a down payment savings plan. Building a concrete savings plan and timeline may help you reach your goal sooner and stay focused. Or, you may also explore some low down payment loan programs.