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Mortgage Gift Letters: What They Are, Why You Need One And How To Write One To Your Lender

Holly Shuffett8-minute read
January 18, 2022

For many of us, buying a home is the biggest financial commitment we’ll make in our lifetime, which can feel like a pretty intimidating feat. There's a reason why buying your first home is commonly regarded as such a big milestone – saving up enough money for a down payment alone can take years.

The good news? You may be able to use cash gifts toward your down payment, turning that daunting price tag into something a more manageable. So if you have a family member, domestic partner, or sometimes even a close friend interested in donating gift funds, read on to understand the importance of a gift letter for mortgage down payments. 

What’s A Gift Letter For A Mortgage Down Payment?

A gift letter is a formal document from the borrower’s donor, the person giving the gift money, that explicitly states the amount they are gifting and that the transaction is not a loan.

A gift letter helps your mortgage lender gain a better understanding of your financial standing while also serving as confirmation that you are not responsible for repaying the gift funds – something which could make you a riskier borrower in their eyes.

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Why Does Your Mortgage Lender Need A Gift Letter?

A gift letter will play an essential role when you face the step in the loan application process known as underwriting. Underwriting is when your mortgage lender reviews your credit score, and income and asset statements to evaluate how creditworthy you are as a borrower.

This typically includes taking an in-depth look at your bank account information, bank statements, tax documents, and W-2 forms. Having a gift letter for your mortgage gives your lender a clear idea of where your assets came from and helps more accurately determining debt-to-income (DTI) ratio.

Mortgage lenders want to confirm that large deposits – outside of a regular paycheck – are indeed your own assets and that you aren’t a risky borrower. And gift letters help confirm this, serving as physical proof that gifted money in your name and bank account is really yours, and that you will have the financial means to make timely mortgage payments.

When Should You Deposit Your Gift Funds? 

It’s best to deposit your gift funds at least 2 months, or 60 days, prior to applying for your mortgage. Many lenders may view sudden influxes of cash, like those obtained through a gifted down payment, as red flags – but time can help show your lender that the gifted money is legitimately yours and not something you’ll have just in the short-term.

In contrast, “seasoned money” – money that’s been in your bank account for 2 months or longer – is a green flag for most lenders, as these funds have officially been in your hands for a substantial period of time. 

How Much Money Can You Receive Before You Need A Gift Letter? 

Maybe Grandma recently gave you a birthday card with $20 inside – surely you don’t need a gift letter for this “transaction.” So, when exactly is a gift letter necessary?

Most mortgage lenders will ask for more information on any gift that is greater than half the value of your total household monthly income. For example, your lender may inquire about a gift over $2,000 if your typical monthly income is $4,000.

This general guideline is usually the case for conventional, VA, and jumbo loans. In regards to USDA or FHA loans, your lender may want more information on any deposits larger than 1% of the appraised value of your home or its adjusted purchase price – whichever amount is greater. 

Can You Repay A Mortgage Gift? 

To put it bluntly, no. A gift letter is required to explicitly state that the donor will not accept any repayment in the short- or long-term, nor is it expected. Mortgage lenders need to be sure that gifted funds are just that – not a loan in disguise for the borrower.

Be sure that your gift letter reflects this rejection of repayment to ensure the legitimacy of the monetary gift. 

How Do You Write A Gift Letter To Your Mortgage Lender?

A gift letter has many key characteristics that you should be sure to include. Let’s take a look at what is typically included:

  • Your name as recipient
  • Name, address and phone number of the donor
  • Donor’s relationship to you 
  • Gift amount
  • Date the funds were or will be transferred 
  • Statement from the donor saying no repayment is expected
  • Language stating that the gift didn’t come from an unacceptable source (seller, real estate agent/broker, loan officer, builder or anyone associated with these parties)
  • Your signature and that of your donor

Gifts of equity – which is when a relative gives you a discount on a property and that discount is applied to your down payment – must also include the property address in their gift letter.

If you’re still fuzzy on what exactly a gift letter looks like or if you want some more help figuring out how to write a gift letter, continue reading to see how a gift letter is usually formatted. 

Mortgage Gift Letter Template 

Figuring out how to write a gift letter is nothing to sweat – not only are they relatively simple, but your lender may even have a gift letter template available to follow when using gift money for a down payment.

And if your lender doesn’t have a gift letter template of their own, feel free to copy or use our template below for guidance:

Date:

 

To: {Name and address of bank, lender, or mortgage provider}

I/We, {name of donor(s)}, have contributed a gift of ${dollar amount of the gift} to {name(s) of recipients(s)}.

The gift {will be used/has been used} toward the purchase of property located at {full address of the house the borrower is purchasing, if known}.

Repayment of this gift by {name of recipient} is not expected neither in the form of cash or future services.

The lender may confirm the source of funds for this gift from this account: {bank name, bank address, type of account (savings, checking, etc.), donor’s account number}.

Signature(s) of Donor(s):

Date of Signature:

Name(s) of Donor:

Donor Address: {street, city, state, zip code}

Telephone Number: [Including area code]

Donor Email Address:

Donor’s Relationship to Recipient: {parent(s), etc.}

Signature(s) of Recipient(s):

Date of Signature:

Name(s) of Recipient: {typed or printed}

By signing this gift letter, both the donor and recipient certify that they didn’t receive the gift funds from any person, business or entity that has any vested interest in the property being sold or any person connected to the transaction (such as the seller, real estate agent, builder, mortgage banker or any entity associated with them).

Who Can Give You A Mortgage Gift Based On Your Loan Type?

Since the rules regarding who can be a donor for gift money varies by the type of loan the borrower is applying for, let’s break down each loan type and the relationships you can have with each donor accordingly. 

Conventional Loan 

As one of the most popular loan types, it’s important to know exactly who can be a donor for conventional loans. Conventional loans are owned by Fannie Mae and Freddie Mac and only allow gift money for a down payment that comes from the borrower’s family members.

Family members recognized by conventional mortgages include:

  • Spouses
  • Parents (including biological, adoptive, step- and foster parents)
  • Grandparents or great-grandparents
  • Aunts and uncles (including step-relatives)
  • Cousins (including step-relatives and adoptive relatives)
  • Nieces and nephews (including step-relatives)
  • In-laws (including parents, grandparents, aunts, uncles, brothers-in-law, sisters-in-law, and future in-laws)
  • Children (including biological, adoptive, step- and foster children)
  • Siblings (including step-relatives, foster and adoptive siblings)
  • Domestic partners
  • Fiancés and fiancées 

FHA Loan

FHA loans are both similar and dissimilar to conventional loans - though they do allow most all family members to donate gift money, FHA guidelines will not accept gift funds from cousins, nieces, or nephews. FHA loans do however, accept gifts from close friends - which can be extended to cousins, nieces, and nephews - and even ex-partners.

Depending on your situation, you may also have more options with an FHA loan, as FHA guidelines state that they will accept gift money from a government agency or public entity that provides home-buying help to first-time home buyers.

Other accepted donors under FHA guidelines also include:

  • Employers
  • Labor unions
  • Charitable organizations which provide financial assistance

USDA And VA Loans

Perhaps the most flexible when it comes to gift money, USDA and VA loans don’t have many restrictions on down payment gifts. Excluding anyone with a vested interest in the sale of a property, pretty much anybody you have a relationship with can qualify as a donor. 

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How Much Of Your Gift Can You Use On Your Property Purchase?

When it comes to using gift money for your down payment, rules and regulations don’t just apply to where the money is coming from but also the type of home you’re buying. Depending on if you’re planning to buy a primary or secondary residence will affect how much in gift money you can put toward your down payment, and how much you’ll have to pay out-of-pocket. 

Primary Residence 

If you’re buying a single-family unit to reside in as a primary residence, you can use gift funds to cover your down payment in full.

For primary residence multi-family units, if you’re planning to put 20% down on a house, you can also pay for the entire down payment with gift funds. But if you’re putting less than 20% down, you will have to use your own, non-gifted money to cover 5% of the down payment. 

Secondary Residence 

Secondary residences have the same guidelines in place as primary residences: you can pay for your entire down payment with gift money if you’re putting 20%, but must cover 5% on your own if you’re planning to have a down payment under 20%. 

Investment Property 

As it stands, it is not permitted to use gift funds to make an investment property down payment. 

Does A Gift Letter Need To Be Reported To The IRS?

It depends on how much you’re receiving in gift funds, but it’s important to be aware that in some cases, your donor may be taxed so be sure to let them know beforehand.

Generally, your donor can gift up to $15,000 without needing to report it to the IRS, as this won’t incur the federal gift tax. And as of 2022, the annual gift tax has been raised to $16,000 – so unless your gift exceeds that, you likely won’t have to deal with the IRS.

For higher amounts of gift money, your donor will need to disclose the amount by filing a gift tax return which will then be recorded and go toward their lifetime gift tax exclusion – the total amount that someone is allowed to gift people. The lifetime exclusion currently sits at $11.4 million and applies both to gifts given during one’s lifetime and those passed on in estate.

For a better understanding of gift money tax laws or for help with your unique situation, it’s best to consult with a financial or tax professional. 

The Bottom Line

The mortgage application process is extensive for good reason – your mortgage lender needs a full picture of your assets and what money is truly yours. Gift letters do just that, while also guaranteeing that repayment won’t be an issue down the line.

For those of us fortunate enough to have a generous benefactor willing to help with a down payment, remember that buying a home requires plenty of time, research, and energy. The more you know about the home buying process, the better you can set yourself up for success.

Visit our Home Buying page for more information and instructional articles to assist you on every step of your home buying journey. 

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Get approved with Rocket Mortgage® and do it all online. You can get a real, customizable mortgage solution based on your unique financial situation.

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Holly Shuffett

Holly Shuffett is a staff writer who writes with a focus on homeownership and personal finance. She has a B.A. in public relations from Oakland University and enjoys creative writing and reading in her free time.