Using Gift Letters for Your Mortgage

Categorized as Blog

Your lender demands a gift letter and supporting documentation when someone offers you money to assist you in purchasing a home. A gift letter is a formal piece of writing that declares that money is received as a gift from a friend or family.

Gift letters are most frequently used when a borrower has received help with the down payment for a new house or other real estate investment. These letters specify that there is no expectation of repayment in any manner, shape, or form for the money received.

Your mortgage provider could ask you to sign a gift letter if you used a gift from family or friends to purchase real estate.

Understanding the guidelines for writing a gift letter for a property can help you avoid errors that might cause your loan approval to be delayed. This post will explain a gift letter, how and why you would use one, and how gifts are taxed.

  • Understanding the guidelines for writing a gift letter for a property can help you avoid errors that might cause your loan approval to be delayed. This tutorial will explain a gift letter, how and why you would use one, and how gifts are taxed.

What Is a Gift Letter for a Mortgage?

Giving each other money presents to help with home-buying expenditures like the down payment and closing charges is a frequent practice. But when using gifts as a home-buying expenditure needs to be certified by the lenders.

A signed letter from a donor attesting that their deposit gift money comes with no payback obligations is known as a mortgage gift letter. Gift letters can refer to any present made for any reason, but they are most frequently utilized when obtaining a mortgage to purchase real estate.

A gift letter is required to show that money received as a gift is not a loan when you buy real estate and want to put it toward closing costs or a down payment on a mortgage.

It is a simple approach to reassure your lender that you are not responsible for repaying friends and family for their gifts of money. Since having more debt might prevent you from getting a mortgage, lenders want to ensure that this money isn’t a loan.

A sale, trade, or other property transfer from one person (the donor) to another is often considered a gift (the recipient).

Cash, checks, or other physical objects, the transfer of ownership of stocks or real estate without getting anything in return, the cancellation of debt, and below-market loans are examples of typical presents.

How to Pay Your Down Payment with Gift Money

The lender needs to be informed that the funds in your account are gifts, not loans. Loans make it harder for you to repay your mortgage and increase the lender’s risk.

Furthermore, the government has established strict regulations to stop financial fraud and other economic crimes.

Show Where Your Down Payment Came From

  • Can’t quantify that the funds you’re utilizing as a down payment are gifts rather than loans?

You might not get a mortgage from your lender. The answer is to get a gift letter to go along with any sizeable cash donation you use as a down payment.

A gift letter certifies to your lender that the funds in your account were not borrowed. The gift letter must be written by and endorsed by the individual who gave you the money, along with their name and contact information.

Know The Gift Money Limits

  • How much money must you get before you require a gift letter?
  • Do deposits above $10,000 need a gift letter in addition to other documentation?
  • Do you require a gift letter from the relative who sent you a card with $50 inside?

Lenders will often ask you to explain any gift you get that is more than half the amount of your entire family’s monthly income.

Your lenders may want you to clarify any presents you get that are worth more than $5000, for instance if your pay is $4,000 per month.

How Should a Gift Letter for a Mortgage Be Written?

The donor’s name, contact information, the amount of the gift, and additional information regarding the house and donation must all be included in a mortgage gift letter.

Although it is written and signed by the donor, your mortgage lender could have a sample you can use instead. A mortgage donation letter must contain the following information:

  • Name and contact details of the donor
  • Address of the property you’re buying
  • Relationship between a donor and a buyer
  • Donation sum
  • Date of transfer of the gift
  • A declaration that the donor does not anticipate payback
  • Bank, account number, and type of the donor’s account
  • Signature of the donor

You can give your lender supporting paperwork after the gift letter is finished. Notaries are not necessary.

What Are Gift Restrictions?

There are no restrictions on how much someone can contribute toward your closing expenses or down payment for a mortgage. However, a portion of the down payment may need to come from your resources, depending on the loan and the property type.

Remember that these standards are subject to change based on financing requirements; thus, check with your mortgage firm for the current rules.

Do Gifts of Money for a Down Payment have Any Tax Repercussions?

When gifts exceed a specific threshold, the IRS levies taxes. You can give up to $16,000 in 2022 without any tax consequences. Other tax-free gifts include

  • Paying for someone else’s tuition or medical costs
  • Presents for your partner. Married couples may contribute up to $30,000 combined without paying taxes because of a tax practice known as “gift splitting.”
  • Gifts made to a political party.

The giver typically pays the gift tax, but in some circumstances, the recipient of the gift may opt to pay it instead.

If a gift is subject to gift tax, the giver is typically responsible for paying it unless the receiver makes other arrangements. Consult a tax expert for guidance on your particular circumstances.

Mortgage Gift Letter Template

Mortgage Gift Letter Template by

Final Thoughts

There is no better moment than when you are looking for a home to receive a sizable monetary present. Traditionally, wedding presents in the form of money, often sizable sums from the bride and groom’s parents were used to finance down payments on a first house.

A gift letter is a formal document that attests to the fact that whatever money you’ve gotten is a gift, not a credit, and the donor doesn’t want you to pay them anything back.

There is no cap on the number of mortgage gifts you may accept or give toward your down payment. Donors may give as much as they desire, and additional money may be given to cover closing fees.

Leave a comment

Your email address will not be published. Required fields are marked *