How to Complete a Gift Letter for a Mortgage Down Payment
When someone gives you money to help you buy a house, your lender requires a gift letter, along with documents showing how the money changes hands. Knowing the rules about completing a gift letter for a mortgage will help you prevent mistakes that could delay your loan approval.
What is a gift letter for a mortgage down payment?
A gift letter for a mortgage is a written statement confirming that funds given to a borrower for a down payment are a gift rather than a loan that has to be repaid. The letter must explain who is gifting the money, where the donor’s funds are coming from and the relationship between the donor and the recipient.
Gift funds can also be used to pay for closing costs, which average between 2% and 6% of your loan amount, depending on your loan amount. Some programs even allow you to use gift money to meet mortgage reserve requirements, which are funds set aside to cover several months’ worth of monthly payments.
Mortgage gift letter template
Lenders generally provide a boilerplate mortgage gift letter template for you to use. Below is a typical gift letter template you can share with donors. Follow the basic instructions on this sample letter to fill out the form, and be sure you understand the fine print.
Why lenders care about gift letter information
Mortgage lenders care about the information on a gift letter for a mortgage for three reasons:
- To document that the person gifting you the money isn’t a party to the home purchase
- To provide in writing that the money you’re receiving is a gift and not a loan
- To inform the IRS of the gift amount for tax purposes
Below are eight pieces of information in a gift letter and why lenders request them:
- The exact dollar amount of the gift. Lenders check to make sure this amount matches what comes out of the donor’s account and goes into your account. The IRS sets limits each year on the maximum amount that can be gifted without a tax consequence.
- The donor’s signed statement that no repayment is expected. This lets the lender know you aren’t borrowing money and won’t incur additional debt.
- The address of the property associated with the down payment. The gift letter ties the gift funds to the home you’re buying.
- The information about the donor’s account, including the bank or investment company’s name, account number and account type (checking, savings or investment). Have a frank conversation with a potential gift donor to ensure they’re comfortable with it. Underwriters review this to make sure the money isn’t coming from an interested party, like a real estate agent or the home seller, and if you don’t provide it, the gift funds can’t be used.
- The date the funds were or will be transferred. Funds can be deposited into your account or the purchase escrow account.
- The donor’s relationship to the borrower. Most loan programs require the funds to come from a relative or friend. Gift funds from your loan officer, real estate agent, builder or anyone part of the purchase contract are almost always prohibited.
- The donor’s name, full address and telephone number. Be sure your donor is comfortable providing this information. It must be included in the gift letter.
- The dated signatures of both the donor and the borrower. Once everyone signs, the gift letter is a legally binding document.
How to document funds tied to a gift letter for a mortgage
Your gift letter has to be backed up with paperwork. You’ll typically need to provide the following:
- The gift check and deposit slip showing closing funds deposited into your account.
- The withdrawal slip or bank statement showing the funds leaving the donor’s account.
- The check made out directly to the closing agent. (Add the transaction escrow number to the check so the funds are directed into the escrow account tied to your purchase. You can get this information from the closing agent.)
- The settlement statement showing funds deposited or wired into the escrow account.
How much money can you receive as a gift for a mortgage?
Most standard loan programs allow some or all of a down payment gift to come from a variety of sources. You can get gift money from a relative or friend, your employer or local labor union, a government agency or even a charitable organization.
For no-money-down mortgage programs, gift funds can be used for closing costs. Although the format for a mortgage gift letter may vary based on the loan type, the basic information requirements are the same.
Gift letter rules for different loan types
Fannie Mae gift guidelines
Lenders follow Fannie Mae guidelines to offer conventional loans, the most common type of home loan taken out in the United States. Conventional loans require a minimum 3% down payment that can come entirely from a gift if you’re buying a single-family residence.
Gift funds for a conventional loan can come from a relative, employer, close long-time friend, government down payment assistance (DPA) program or a charitable organization.
Freddie Mac gift guidelines
Similar to Fannie Mae, Freddie Mac provides funding for conventional loans. Under Freddie Mac guidelines, your entire down payment can be gifted by a relative if you’re buying a single-family home as your primary residence. Freddie Mac also allows you to use wedding gift funds from relatives and friends under two conditions:
- You provide a copy of your marriage license
- You show the funds being deposited into your bank account within 90 days of your marriage license date
FHA gift guidelines
The Federal Housing Administration (FHA) insures loans made by FHA-approved lenders with a minimum 3.5% down payment that can be gifted. An FHA gift letter is required, with supporting documents resembling those necessary for conventional guidelines. FHA loans are popular with some first-time homebuyers because they allow a minimum 580 credit score to qualify, which is lower than the 620 minimum conventional lenders require.
VA gift guidelines
The U.S. Department of Veterans Affairs (VA) guarantees home loans for eligible military borrowers. VA loans don’t require a down payment, but VA guidelines allow borrowers to use gift funds toward closing costs, or a down payment, if they want to make one. The gift letter and documentation requirements are similar to FHA and conventional loans.
USDA gift guidelines
The U.S. Department of Agriculture (USDA) guarantees no-down-payment USDA loans to families with a low to moderate income in approved rural areas of the country. 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.
Gift letter requirements for property types
The program details above allow you to get a gift for your entire down payment, as long as you’re buying a one-unit (single-family) home as your primary residence. However, some programs require you to come up with all or part of the down payment cash on your own, especially if you’re buying a multifamily home, second home or investment property.
Use the table below as a quick reference guide on the gift letter requirements for different property types.
|Loan program||Occupancy type||Property type||Amount that can be gifted|
|Conventional||Primary home||One unit||Down payment, closing costs and reserves|
|Two units||Up to 12% of the 15% required down payment|
|Three to four units||Up to 22% of the 25% required down payment|
|Second home||One unit||Down payment, closing costs and reserves|
|Two to four units||All but 5% of the down payment requirement|
|Investment property||One to four units||Gift funds not allowed|
|FHA||Primary home||One to four units||Down payment and closing costs|
|VA||Primary home||One to four units||Down payment and closing costs|
|USDA||Primary home||One to four units||Down payment and closing costs|
Are there tax consequences for down payment gift funds?
The IRS taxes gifts made over a certain dollar amount. For 2022, you can gift up to $16,000 without any tax penalty. In most cases, the donor has to pay the gift tax, but there may be special cases when the gift recipient can agree to pay it instead. Check with a tax professional for advice on your specific situation.
What is a gift of equity letter?
Home equity is the difference between a home’s value and outstanding loan balance, and a gift of equity allows a seller to gift a portion of their equity to a family member, fiancé/fiancée or a domestic partner. A gift of equity letter is required, instead of a regular gift letter.
With a gift of equity:
- The gift represents the amount of equity the seller gives to the relative buying the home.
- The documentation requirements are similar to a regular gift letter.
- There is no exchange of actual money.
- The equity is given to the buyer as a credit at closing.
Here’s a quick overview of how the gift of equity rules apply, depending on your chosen loan type:
- Fannie Mae and Freddie Mac. Gifts of equity can only be made to a relative, fiancé/fiancée or domestic partner.
- FHA. Gifts of equity are only allowed for home sales between family members.
- VA. The VA doesn’t allow gifts of equity.
- USDA. Any gift of equity must reduce the home price.