Gift Letter For Mortgage: What It Is And When You Need One

Most people appreciate a generous gift, and money for a home purchase is no exception. The extra financial support can be instrumental in helping you reach your homeownership goals.

But this supplementary funding can also call for additional paperwork on your end. Your lender may ask for a gift letter if someone gives you cash to put toward the purchase of a home.

Let’s explore mortgage gift letters, when a home buyer might need one, the tax implications of this letter and why giving one to your lender can be important.

What Is A Gift Letter For A Mortgage?

A gift letter for a mortgage is a legal, written statement your lender may require if you’re gifted cash to buy a home. In the letter, the borrower’s donor confirms the funds are a gift, not a loan they expect to be repaid. Cash gifts are commonly used toward a down payment but can also be used to pay for closing costs.

A gift letter can help show a lender you’re a low-risk borrower, making the lender more confident in your financial readiness to purchase a home.

Why Do Lenders Require A Gift Letter For A Down Payment?

Lenders assess the risk of lending you money during the underwriting process. Underwriting involves reviewing your credit score, income and assets to determine your creditworthiness. To do so, lenders may look at your bank account information, bank statements and tax documents.

Having a gift letter for your mortgage helps confirm the legitimacy of your assets. Mortgage lenders want to be sure any large deposits in your account are actually yours. They also want to verify you’re in a good financial position to make timely monthly payments.

Key Components Of A Mortgage Gift Letter

A mortgage gift letter typically has the following components:

• Recipient name
• Donor’s name, address and phone number
• Donor’s relationship to recipient
• Gift amount
• Date the funds were or will be transferred
• Statement from the donor saying no repayment is expected
• Language stating the gift didn’t come from an unacceptable source (seller, real estate agent/broker, loan officer, builder or anyone associated with the home-buying process)
• Recipient and donor signatures

For gifts of equity, your gift letter also needs to include the property address. A gift of equity is when a family member sells you a home for a price below market value.

Gift Letter For Mortgage Template

Now you know the key characteristics of a gift letter, but you may still wonder what exactly one looks like. Fortunately, using a template can make writing a gift letter relatively simple.

In fact, your lender may have a gift letter template available to use. Otherwise, we’ve provided a gift letter for a mortgage template below.

{DATE}

{LENDER NAME}

{LENDER ADDRESS}

To Whom It May Concern,

I/We, {DONOR NAME(S)}, have contributed a gift of ${DOLLAR AMOUNT OF THE GIFT} to my/our {RECIPIENT(S) RELATIONSHIP TO DONOR(S)} {RECIPIENT NAME(S)}.

The gift {WILL BE/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 {RECIPIENT NAME(S)} is not expected either 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, ACCOUNT TYPE (savings, checking, etc.), DONOR’S ACCOUNT NUMBER}.

{DONOR SIGNATURE(S)}                                         {DATE OF SIGNATURE}

{PRINTED OR TYPED DONOR NAME(S)}

{DONOR(S) ADDRESS, PHONE NUMBER, EMAIL ADDRESS}

{RECIPIENT SIGNATURE(S)}                                   {DATE OF SIGNATURE}

{RECIPIENT NAME(S)}

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

Rules For Mortgage Gift Letters

When you provide a gift letter, you need to follow rules based on the type of home loan you get and the type of property you buy. Such rules specify what’s considered a gift, which family members can gift you money and how much gift money you can use. Be sure to talk with your lender about the restrictions and rules that apply to your gift letter. Let’s briefly consider some potential rules.

By Loan Type

As mentioned, the rules for a mortgage gift and the associated gift letter differ by loan type. Keep in mind, though: Gift guidelines are subject to change. For this reason, you’ll want to speak with your lender to find out which rules apply to your situation.

Conventional Loan

The most common type of mortgage, a conventional loan is a mortgage loan that isn’t insured by an agency of the federal government but by a private lender. Family members are an acceptable source for gifting you money in connection with a conventional loan.

For conventional mortgage loans, acceptable sources are:

• Spouses, domestic partners, fiancés or fiancées
• Children or other dependents related to the recipient by blood, marriage, adoption or legal guardianship
• Any individual related to the recipient by blood, marriage, adoption or legal guardianship (including parents, grandparents, great-grandparents, aunts, uncles, cousins, nieces, nephews, in-laws and siblings)
• Any individual not related to the recipient by blood, marriage, adoption or legal guardianship but who has close, family-like ties (including godparents, a domestic partner’s relatives, and former relatives)
• A relative’s trust or estate

Family members can gift you the total down payment amount for a conforming loan, which is any conventional loan that isn’t a jumbo loan – a loan that exceeds the conforming loan limit put in place by the Federal Housing Finance Agency (FHFA). With a jumbo loan, however, some lenders may require that you make part of your down payment with your own money.

If the down payment is less than 20% on a second home or a 2- to 4-unit principal residence, at least 5% must be your own funds.

FHA Loan

Like conventional loans, FHA loans – insured by the Federal Housing Administration – allow many types of family members to gift you money. The difference is the FHA won’t accept down payment gift funds from cousins, nieces or nephews. However, gifts from close friends are acceptable, which can extend to cousins, nieces, nephews and ex-partners. The FHA also allows donations from employers, labor unions and charitable organizations.

Eligible donors can usually donate the entire down payment amount for an FHA loan. The down payment required depends on the borrower’s credit score. The minimum down payment is 3.5% with a credit score of at least 580. The FHA requires a down payment of 10% or more for a credit score of 500 – 579. Check with your lender to confirm these requirements if pursuing an FHA loan.

USDA And VA Loans

USDA loans and VA loans – government loans backed by the Department of Agriculture and the Department of Veterans Affairs, respectively – accommodate mortgage gifts quite well. Mostly anyone you have a relationship with can qualify as a donor. One notable exception to this is a real estate agent or anyone else who might have a vested interest in the sale of a property.

You can often make the full down payment with gifted funds, as long as the donor meets the specific loan program’s requirements.

By Property Type

The type of property you buy also affects the amount of gift money you can put toward your down payment.

Primary Residence

A primary residence is the home you live in for the majority of the year. This can be a single-family home, an apartment, condo, townhome or otherwise. You can use gift funds for the down payment on your primary residence.

However, the following guidelines apply:

• For a single-family unit, you can use gift funds to cover your entire down payment.
• For a multifamily unit, the entire down payment can come from gift money as long as the down payment is 20% or more.
• If your down payment on a multiunit home is less than 20%, at least 5% of the down payment funds must be your own money. The remainder can be gift money.

Secondary Residence

A secondary residence, also called a second home, is a residence you occupy for at least 14 days each year. This can be a vacation home, short-term rental property or any other home you visit every so often.

If you’re looking to use gift funds to make a down payment on a second home, consider the following guidelines:

• If your down payment is 20% or more, all funding can come from gifts.
• If your down payment is less than 20%, you must contribute 5% of your own funds.

Investment Property

You currently can’t use gift funds to make a down payment on investment properties.

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

Mortgage lenders generally ask you to present a gift letter for any gift that’s more than half of your total household monthly income. Suppose, then, that your total monthly income is around $4,000. If you receive a gift of $2,000 or more, your lender will likely want to know more about who and where the gift is from.

This general guideline also often applies for conventional loans and VA loans. For a USDA loan or an FHA loan, lenders may request a gift letter for deposits larger than 1% of the appraised value or the adjusted purchase price of your home – whichever is greater. Ask your lender about their gift letter policies when you apply for a mortgage.

Does A Mortgage Gift Letter Get Reported To The IRS?

Whether mortgage gift money gets reported to the IRS depends on how much you receive. For 2024, the annual gift tax applies to amounts over $18,000. This means any gift of $18,000 or less won’t incur the federal gift tax and doesn’t need to be reported to the IRS.

For any gift funds above $18,000, your donor must disclose the amount by filing a gift tax return. This goes toward their lifetime gift tax exclusion, which is the total amount a person can gift someone before owing taxes. It applies to gifts given during one’s lifetime and those passed on in an estate. The 2024 lifetime exclusion is $13.61 million.

For a better understanding of how gift money tax laws impact your situation, consult a financial or tax professional.

Mortgage Gift Letter FAQs

Let’s explore the answers to some frequently asked questions about gift letters for mortgages.

When should I deposit gift funds?

Lenders want to be sure that gifted funds are legitimately yours and not something you’ll have for a short time. So, depositing gift funds at least 2 months (or 60 days) before applying for your mortgage is best. “Seasoned money” – money that’s been in your account 2 months or longer – is even better.

Does a gift letter need to be notarized?

Mortgage gift letters don’t need to be notarized. But to be valid, the letter does need to include certain elements – such as the donor and recipient signatures and the gifted amount.

What are the risks of signing a gift letter?

Signing a gift letter isn’t inherently risky. But you can face repercussions if you break the gift letter terms by repaying the gifted funds when the gift letter states that the funds aren’t a loan to be repaid. Repaying the gifted funds could be considered mortgage fraud, which is a federal crime.

The Bottom Line: Gift Letters Have Certain Guidelines To Follow

A mortgage gift letter confirms that gifted funds are rightfully yours and that your donor won’t expect repayment in the future. Gift letters also help paint a more complete picture of your financial situation, which is key to the mortgage application process.

Knowing where you stand financially is especially important when buying a new home. Download the Rocket Money℠ app today for the tools you need to keep a close eye on your personal finances and reach your home buying goals.