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Key takeaways

  • Gift letters for a mortgage are essential documents for verifying the source of a homebuyer's down payment.
  • Gift letters are required by mortgage lenders to prove that the funds need not be repaid, and that the donor is not involved in the home purchase nor the title.
  • Different loan types have different guidelines for down payment gifts, and the rules vary by property type.

Homebuyers often turn to friends and relations for help with a hefty down payment. A gift letter for a mortgage is a document that validates the source of down payment money that comes free of charge from a family member or friend. This document is essential to the mortgage underwriting process, letting mortgage lenders verify the legitimacy of the gift funds. Here’s how a gift letter for a mortgage works and who is eligible to give money for a mortgage down payment.

What is a gift letter for a mortgage down payment?

A gift letter is a document that helps satisfy the requirement that a borrower’s down payment funds come from legitimate sources. The mortgage lender needs to know that the funds came from someone with a relationship to the homebuyer, and that the money isn’t coming from an illegal source.

Through a gift letter, the giver verifies in writing not only that they actually provided the money but also that they had the financial means to give it by providing bank statements as proof. This verification is especially important for FHA loans.

The giver also verifies that the funds won’t ever have to be paid back by the recipient. If the recipient were to have to repay the gift, the lender would have to calculate that in terms of a debt obligation to see if the homebuyer would still qualify for the loan.

At minimum, a gift letter should include:

  • Who the giver is and their relationship to the recipient
  • Evidence of the giver’s ability to gift the money
  • Where the gift is sourced from
  • The amount of the gift
  • What the gift is to be used for
  • The address of the house the recipient is purchasing (if an offer is already in place)

To protect both parties, it’s also wise for the letter to include that there’s no expectation of repayment, either by financial reimbursement or by performing a service, and that the giver will not place a lien on or otherwise make a claim to the property, even though they contributed to the purchase of it.

Mortgage
Why do lenders require a gift letter?
When lenders are underwriting a mortgage, they like to understand how the applicant’s finances, and how, exactly, they are paying for the home. A gift letter establishes and explains the provenance of a large lump sum that would otherwise be unaccounted for amid the applicant’s wages or savings. It indicates that the funds are not from an illegal source, but from someone with a relationship to the aspiring homebuyer. Gift letters also attest to the fact that the money is a no-strings present, and not an additional debt the applicant has incurred.

Who can gift money for a mortgage down payment?

Most loan programs allow gift money from family members, including parents, grandparents and siblings, spouses, domestic partners and significant others. Some lenders, however, may also permit gifts from non-relatives.

Fannie Mae and Freddie Mac loans specifically require the gift to come from a family member or domestic partner. FHA, USDA and VA loans have similar requirements but also allow gift money from close friends, charitable organizations, government assistance programs and the borrower’s employer. In all instances, the giver must not be a financially interested party, such as the real estate agent or the seller.

Down payment gifts in the underwriting process

Borrowers can use gift money for a down payment, but lenders must verify the source of the funds, especially if it is a large amount. Mortgage lenders need assurance that borrowers have the means to make their monthly payments (both principal and interest), and a gift letter confirms that the funds are in fact a present that doesn’t have to be paid back. Different loan types have different guidelines for down payment gifts.

Underwriters carefully review bank statements for the past two months, paying attention to large deposits exceeding 50 percent of monthly qualifying income. Funds used for the mortgage must be traced and held in the borrower’s account for a certain period of time. Financial assistance from parties with a vested interest in the transaction, such as the real estate agent, is not allowed. Failure to verify the sources of the funds or if they are deemed unacceptable (for example, money laundering or fraud) could result in the lender denying the loan.

How to use gift money for a down payment

If you receive gift money that exceeds half of your monthly household income, you’ll likely need to show your lender a gift letter. Any gift deposits less than that amount will not need a gift letter. You can use gift money for your entire down payment or just a part of it, but the exact breakdown of funds will depend on your loan and property type.

If your down payment will be made with a gift, you should expect the lender to request the following documentation:

  • A gift letter signed by you and the giver
  • Bank statements from the giver
  • Other proof of funds, if needed

Depending on the loan type and down payment amount, you may be required to provide additional paperwork to show where the gift funds came from and ensure that the giver is an acceptable source. For example, the FHA and conventional loans have different definitions of a “large deposit” and may require additional documentation.

$32,500

Median down payment on single-family homes purchased with financing in Q4 2023

Source: ATTOM Q4 2023 U.S. Residential Loan Origination Report

Mortgage gift letter rules by loan type

The rules vary by loan program:

  • Fannie Mae and Freddie Mac conventional loans: If you’re buying a single-family home, your entire down payment can come from a gift. The funds can come from a relative or a nonrelative that has a familial relationship to you, such as a domestic partner or a godparent. Freddie Mac also allows borrowers to use wedding gifts and graduation gifts, so long as you provide a copy of your marriage license or your diploma, respectively.
  • FHA loans: The Federal Housing Administration (FHA) backs mortgages with a minimum down payment of 3.5 percent. The full amount can be gifted, but the FHA requires a gift letter and supporting documents similar to those for Fannie and Freddie loans.
  • VA loans: Mortgages guaranteed by the U.S. Department of Veterans Affairs (VA) require no down payment, but VA guidelines allow borrowers to put gift funds toward closing costs or a down payment (if the borrower opts for one). The documentation rules are similar to those of FHA and conventional loans.
  • USDA loans: The U.S. Department of Agriculture (USDA) guarantees no-down-payment mortgages to borrowers with low-to-moderate income in USDA-approved rural areas. Like the VA loan program, gift money can be used to pay closing costs. You’ll need to provide a gift letter and supporting documents consistent with the gift letter rules of other loan programs.

Mortgage gift letter rules by property type

The rules around gift amounts vary by the type of property you’re buying:

  • Primary residence: You can use gift funds to buy a primary residence. If you’re buying a single-family residence (not a duplex or other multi-unit property), you can make the down payment without contributing any of your own money.
  • Second home: Lender rules around down payments on second homes are similar to the rules for a primary residence. If you’re putting down at least 20 percent, the gift can cover the entire amount. If your down payment is less than 20 percent, then at least 5 percent of your down payment must be drawn from your own funds.
  • Investment property: You can’t use gift funds for the down payment on real estate you’re investing in or using for income.

Gift letter for mortgage template

Your lender might have a gift letter template it requires borrowers to use, so be sure to ask your loan officer before writing your own. Below is a sample for illustrative purposes only.

Document
Gift letter for mortgage template
DATE

LENDER NAME

LENDER ADDRESS

LENDER PHONE

I/We, [GIVER], are gifting [AMOUNT OF GIFT, IN DOLLARS] to [RECIPIENT], who is my/our [NATURE OF RELATIONSHIP], in contribution to a down payment for the purchase of property at [ADDRESS OF PROPERTY].

These funds are being sourced from [ACCOUNT INSTITUTION/NUMBER], and are given freely and without any claim to the property or expectation of repayment, now or in the future.

GIVER SIGNATURE

GIVER NAME (PRINTED)

GIVER ADDRESS

GIVER PHONE

Should you gift a relative a down payment?

In this era of high rents, pricey homes and student debt burdens, it’s challenging for young people to save for a down payment. Helping your child or other relative buy a home can get them started building equity and owning a key asset sooner, contributing to their long-term financial wellbeing.

Consider, though, why your child needs help buying a home. Your support might not be enough for them to become a successful homeowner if they aren’t financially literate or responsible in general, for example.

Also, depending on the gift amount and your relationship with the recipient, there may be gift tax implications (see FAQ). Be sure to speak with a licensed tax professional to learn what applies to your situation.

Alternatives to down payment gifts

There may be other ways you can help your child buy a home. Naturally, these alternatives also come with their own drawbacks as well as advantages.

  • Buy the home, then have your child repay you. This option could simplify the process for your child, but it’s still complicated. That kind of transaction should only be done with the help of the attorney and not on an informal basis. Otherwise, when the homeowner goes to sell, it could mess up having a clean title. Consult a real estate attorney and don’t take shortcuts.
  • Co-sign the mortgage application. This can boost the child’s chances of securing financing. Bear in mind that co-signing means you won’t have any ownership stake in the home, but you’ll be on the hook for the payments if your child can’t make them. If you’re retired or close to it, you might not be able to shoulder that cost on a fixed income. 
  • Become a co-borrower on the mortgage. Also referred to as a co-applicant, this status is similar to being a co-signer, but it gives you co-ownership to the home. However, it also gives you more paperwork and liabilities: The lender will consider your assets, credit history and income as part of the application. It will also consider you equally responsible for the debt — not just if the child falls delinquent.
  • Help with the closing costs.  Assorted administrative and transactional fees can add up to as much as 5 percent of the home price. Though not as big as a down payment, helping with these upfront costs can ease the homebuying burden.
  • Allow your child to rent a room at home at a discount — or for free. If you’re fine with your child living with you and have the space, you can help boost their down payment savings by offering a room in your home, either at no cost or for below-market rent. If you choose to charge rent, establish an agreement around how long they’ll rent from you, as well as any other household expenses you’d like them to contribute to during their “lease.”

 

FAQ about down payment gifts

  • Not many loan programs or lenders dictate how much money can be gifted for a down payment, but there might be tax implications for the giver.


    For 2024, an individual can gift up to $18,000 without any tax consequences. By a tax rule known as “gift splitting,” married couples can gift up $36,000 in 2024 to another person without liability, as well.


    That’s just the annual exemption, however. There is also an exemption that applies to gifts over a lifetime. For this reason, most givers won’t be subject to the gift tax, even if reporting a large gift.
  • Gift letters are required by mortgage lenders as documentation to prove that the funds received are a gift, not a loan, and that the donor is not involved in the home purchase. The gift letter is an official document that verifies the nature of the received money as a gift, with no expectation of repayment. It also helps inform the IRS about the gift amount for tax purposes.
  • Recipients of gift money for a mortgage do not have to report the money received as a gift to the IRS or pay taxes on its value.
  • If you’re using a significant amount of gift money as your down payment on a house, it’s best to wait for at least two months before applying for a mortgage. Many lenders require that your assets be present in your account for a minimum of 60 days in order to consider them secure or “seasoned” funds. If you receive financial gifts or other significant cash injections within 60 days of purchasing a home, you should be prepared to provide documentation, such as gift letters, to demonstrate the source of those funds.

Additional reporting by Mia Taylor