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If you're gifted money for a down payment or other closing costs associated with the mortgage, your donor needs to send a gift letter to your mortgage company.
When you buy a home, your mortgage company will require you to make a down payment before lending you money. Your down payment can be a small amount, or you can put down 20% or more and avoid added expenses like private mortgage insurance and potentially land a low interest rate.
One way to complete your down payment or other closing costs is by using a cash gift from a relative, but in order for the gift payment to be accepted, your donor needs to write and sign a gift letter and send it to your lender.
There are certain rules and requirements for mortgage gifts, and certain information must be included in the letter to ensure that the funds are legitimate.
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To ensure that your assets are legitimate and that you’ll be able to pay your mortgage, you’ll have to go through underwriting. During underwriting, your insurer will look at different aspects of your finances, like your credit score, your debt-to-income ratio, and your W-2s and bank statements.
When the mortgage underwriter looks at your bank statement and sees the gift money, they want to make sure that it’s not a loan that you’ll need to pay back.
Similarly, if your donor goes cuts your mortgage company a check for the down payment or closing costs, the bank will want to make sure that the funds aren’t something you need to pay them back for. A gift letter is that proof.
During the conditional approval stage of the underwriting process, you’ll be notified if you have a gift letter requirement. You’ll also be notified of any additional conditions that must be resolved in order for the mortgage to be approved.
Depending on the bank, they may provide you with the gift letter template. If not, Policygenius has a handy template below that you can use.
As we’ve already gone over, a gift letter is a letter from your donor to your mortgage company stating that the money you were gifted is just that, a gift, and that no repayment or future services are expected or implied from the donor’s end.
Gift letters should generally include the following:
Depending on the type of loan you’re getting, there are different rules dictating who the gift can be from if you plan on using it for mortgage-related expenses.
For conventional mortgage loans insured through Fannie Mae, the mortgage gift must come from a family member. According to the Fannie Mae website, the donation may come from:
Regardless of if they’re relatives or not, the donor can’t be someone who has a financial interest in the property, such as a builder, developer, or real estate agent.
FHA loans, which insured by the Federal Housing Administration, have more relaxed rules regarding who the gift can come from. According to the FHA, the money can be donated from a friend, family member, employer, or an approved nonprofit agency or charity. As long as the gift isn’t coming from someone with a stake in the property, it’s acceptable.
Loans through the USDA or VA have the same down payment rules as FHA loans. As long as the gift isn’t from an “interested party,” you can use it toward your down payment and other closing costs.
For FHA and other low-down-payment loans, there are no limits on how much of your down payment money can come from a donor. But if you’re getting a conventional loan from Fannie Mae or Freddie Mac, there may be minimum borrower contribution requirements depending on your home type and LTV, or loan-to-value ratio, as described in the table below.
|LTV||Home type||Minimum borrower contribution|
|80% or less||One- to four-unit primary residence||No minimum borrower contribution is required. All of the down payment funds can come from a gift.|
|80% or less||Second home||No minimum borrower contribution is required. All of the down payment funds can come from a gift.|
|Greater than 80%||One-unit primary residence||No minimum borrower contribution is required. All of the down payment funds can come from a gift.|
|Greater than 80%||Two- to four-unit primary residence||The borrower must make a 5% minimum down payment contribution from his or her own funds.|
|Greater than 80%||Second home||The borrower must make a 5% minimum down payment contribution from his or her own funds.|
Something to keep in mind is that gift funds can go toward other closing costs as well, not just your down payment.
As the gift recipient, you’re not responsible for any tax liability on funds you receive. But if you’re the person giving the gift, you’re responsible for a gift tax on funds exceeding a certain amount, which is called the gift tax exemption.
The gift tax exemption was $15,000 if you’re filing single, and $30,000 if you’re married and filing a joint return. Be sure to discuss the potential tax implications with the individual or individuals gifting you the money.
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