- Mortgage lenders need documentation for large deposits into your bank account. For donated funds, this means providing a gift letter.
- A gift letter must include the donor’s name and contact information and a statement that no refunds are expected.
- Who can give you funds for a down payment and how much they can give depends on your type of loan and how the property you are buying is classified.
Saving up enough for a down payment is often the biggest hurdle first-time homebuyers face. To overcome this, many look to their loved ones to help them bridge the gap between what they need and what they have saved.
In 2019, 32% of first-time homebuyers received a gift or loan from a relative or friend as a down payment, according to a 2020 report by the National Association of Realtors.
For most types of mortgages, you can use gift funds to get your down payment. You might just need a little documentation to back it up.
What is a gift letter for a mortgage?
A mortgage gift letter is a statement written by the person who gave you the funds that confirms that the money is a gift and that repayment is not expected. The gift letter must contain information about the gift giver and their relationship to the recipient.
When you apply for a mortgage, lenders dig through your financial information to make sure you have the funds to make the down payment and that you have the income to pay your monthly payments. As part of this process, you will usually provide your creditor with two months’ worth of bank statements.
If he notices any unusually large deposits in his bank account, he will want to know where that money came from. Lenders do this to ensure that:
1. You are not using a loan for your down payment, which would change the circumstances of your mortgage approval and potentially make it more difficult for you to pay your monthly mortgage payments.
2. The money is from an acceptable and non-fraudulent source.
“The gift letter serves as a sworn statement that the funds are donated and not loaned to the borrower,” says Melissa Cohn, regional vice president, William Raveis Mortgage.
Do you need a gift letter for savvy funds?
If creditors only ask for bank statements from the previous two months, does that mean any deposits made before that are free? In general, yes. Once the money has been in your bank account for a certain period of time, it will be considered “seasoned”.
“If the borrower can show two months of bank statements without large deposits, then the money is tempered and no gift letter is needed,” says Cohn.
But remember that even if you are not asked to provide a gift letter, you still need to be honest with your creditor when answering questions about your finances. Lying on a mortgage application constitutes mortgage fraud.
Advance gift rules
When it comes to the source and value of the funds you are receiving, the rules on what is allowed differ depending on the type of mortgage you receive.
None of the loan types listed here allow those with a financial interest in the transaction (such as your real estate agent or the seller) to offer you funds for a down payment.
If you are receiving a conventional mortgage backed by government-sponsored companies Fannie Mae or Freddie Mac, you will only be able to receive gift funds from relatives. That includes:
- Spouse, fiance or domestic partner
- A child or other dependent
- Someone you are related to by blood, marriage, adoption, or legal guardianship
If someone you are not related to, such as a close friend, is planning to give you money for a down payment, you will need to deposit these funds a few months before applying for a mortgage, to ensure they are properly tempered.
In some cases, there may be limits on how much of your advance can come from another source. If you’re buying a second home, for example, a certain part of your down payment may come from your own funds.
Your entire advance can be funded using a gift if you are purchasing one of the following:
- One unit main residence
- A two to four unit main residence if you make a down payment of 20% or more
- A second home if you make a down payment of 20% or more
If you are purchasing a two to four unit main residence or a second home with a down payment of less than 20%, you will need to contribute at least 5% of the property value from your own funds. Gift funds cannot be used to purchase an investment property.
Government guaranteed mortgages
If you are getting a mortgage backed by a government agency, the rules are slightly different.
For FHA mortgages, which are backed by the Federal Housing Administration, the list of people who can contribute to your down payment is a little longer than with conventional loans.
Acceptable down payment givers on FHA mortgages include:
- Your employer or union
- A close friend with a “clearly defined and documented interest in the borrower”
- charitable organizations
- Government agencies or public entities that provide assistance to low- to moderate-income families and first-time home buyers.
USDA mortgages and VA mortgages are even more lenient. As with the other loan types listed here, you cannot receive gift funds for your VA or USDA down payment from parties with a financial interest in the transaction. Other than that, there are no rules that restrict where your gift can come from.
With all these government guaranteed mortgages, there is no minimum contribution requirement from the borrower; your entire advance can come from gift funds.
How to write a gift letter for a mortgage
The main piece of information your lender is looking for in a gift letter is a statement from the donor that the funds are a gift and that you must not repay them. They want to make sure that the funds you are receiving are not a loan, as a loan cannot normally be used for a down payment.
Your creditor can provide a template of what they want the letter to include. This will likely include:
- Donor name and contact information
- their relationship with you
- The date the gift was or will be given
- Statement that the funds are a gift, no refund is expected, and none of the funds were given by anyone with an interest in the transaction.
- Address of the property to be purchased
- Information about the account where the gift came from
- Donor and recipient signatures
Gift letters and tax consequences
As a recipient, you usually don’t have to worry about the tax consequences of receiving gift funds for an advance. But you might want to make sure your donor knows that if they give you a large enough amount, they will need to report it to the IRS.
For 2021, the annual gift exclusion was $15,000. In 2022, it’s $16,000. If your donor gives you less than that, he probably doesn’t need to publicize his gift. If they give you more, anything they give you beyond the annual exclusion will need to be disclosed to the IRS. But even if you go over that threshold, they probably won’t have to pay taxes on it; the amount will only be deducted from your lifetime gift tax exemption.