What is a Gift Letter?

A gift letter is a written statement that is required when someone lends you money for a mortgage down payment. The gift letter is a statement from the donor that tells that the funds are a gift with no expectation of repayment.

A gift can be a sale, exchange, or other transfer of property from one person to another. It may be cash, check, or other tangible items, transferring a title to stocks or real property without receiving anything in exchange for value, forgiving debt, or below-market loans.

The gift form contains the following:

The exact amount of the gift in dollars
The date the funds were or will be transferred
The donor’s signed statement that no repayment is expected
The donor’s name, address, and telephone number
The donor’s relationship to the recipient
The mortgage gift letter form also identifies the address of the property the gift funds are being applied to
If you fail to fill out this form, your loan may be delayed or denied.

How to fill out a Gift Letter?

Applicant(s)
Provide the name of the applicant(s).

Loan Number
Enter the loan number on the space provided.

Donor
Provide the name of the donor.

Amount
Provide the amount being lent in dollars on the space provided.

Recipient
Provide the name of the recipient.

Relationship
Enter the relationship of the donor to the recipient.

Property Address
Provide the location of the property.

Source
Enter the source of the gift (a relative, friend, your employer, local labor union, government agency, or even a charitable organization’s bank account).

Donor Signature
Provide the signature of the donor in the space provided.

Date
Enter the date the gift letter form was signed and completed.

Donor Name
Provide the name of the donor.

Donor Phone Number
Enter the donor’s phone number.

Borrower’s Signature
Provide the borrower’s signature on the space provided.

Frequently Asked Questions About a Gift Letter

What does a gift letter mean?

A gift letter is a document written by the donor of a gift, often with an attached check. The letter details what the gifted funds are to be used for, and is often used in conjunction with scholarship applications or other paperwork that must include proof of funding. It can also be called a thank you note, donation acknowledgment, contribution receipt, or donation information form. Moreover, a gift letter is often used when donors provide funding for multiple activities or events. It might be necessary to provide proof that the contributed funds were not used for any other purpose than that which the donor designated.

In terms of its use for a mortgage, it is a document from the person who will be providing the down payment on a house, stating that they are gifting their money to help secure the loan.

How do gift letters work?

Gift letters work by lowering or eliminating gift and estate taxes. The gift letter is a simple written statement, usually made on your bank's stationery, to the effect that you plan to give someone or the "beneficiary" $10,000 as a gift. This means that you will not be making the gift out of your own funds; rather, you will be borrowing the $10,000 from your checking account to give to the beneficiary.

The person receiving the gift or the "donee" should sign and date the letter, acknowledging their receipt of $10,000 as a gift. You should keep a copy for your records. It is recommended that both parties make additional copies of the letter for their files.

Gift letters are typically used in the following five situations:

To make a gift to an individual who does not yet qualify for Supplemental Security Income (SSI), but is close to the qualifying level;
To make a gift to someone who already receives SSI;
To pay expenses for a disabled person;
To make a gift of appreciated assets, such as stock that has increased in value; or
Where the donor is unable to pay higher taxes on capital gains and wants to give cash instead.

Does a gift letter for a mortgage need to be notarized?

A gift letter for a mortgage does not have to be notarized; however, all the parties involved must sign it for it to be official. Moreover, it must contain the reason for the gift, which is why it is sometimes referred to as a gift letter.

The importance of this document lies in its ability to prevent possible tax complications arising from the transaction. As most mortgages are financed through trusts/companies, any funds given by one party to another are automatically deemed taxable. For example, if someone loans you $5,000 to put towards your down payment, the interest on that loan is taxable. However, when an individual gives money/property as a gift; there are no taxes involved.

This document also acts as proof of the transaction should questions arise in the future. If for example, one day your mother stopped by your bank to withdraw the money she used as a down payment on your house, the bank would need her gift letter in order to verify that you are eligible for a mortgage.

How do you prove gift money for a mortgage?

The following are ways to prove you received the money as a gift for a mortgage:

Write the money down as a gift on your loan application.
Get a bank statement that says the person transferred the money directly to you or they wrote you a check that is deposited into your account. Make sure this transaction takes place around the same time you are applying for the mortgage so there is not too much of an overlap.
Get documentation of the person's bank account transaction history showing the specific date they transferred the money. Make sure this is not too close to your application date or it can look like you are using that money for your down payment. If the person has more than one bank account, get their statements from all accounts since sometimes it can be hard to find one specific transfer.
If the person gives you cash, deposit it into your account and provide a bank statement as above. You must also provide an explanation as to why this is different than the first option where the money was transferred directly from their account to yours. Also ensure that if they give you cash, they do not give you more cash than the value of the gift.
If a parent wants to gift their child money for a down payment, they can use something called an Irrevocable Life Insurance Trust (ILIT). The parents set up this trust and transfer money into it. When the child decides to purchase a house, the ILIT, not the child, is listed as the owner of the life insurance policy. When it comes time to purchase a home, they just cancel that policy and receive their money. The beauty of this tactic is that if someone challenges whether or not you received that cash as a gift, you can just show them proof you canceled your life insurance policy. The ILIT does not save you any money on your life insurance premiums, it simply suspends them until the life insurance is canceled. You must still pay for the life insurance — the monthly premium, but you no longer get the benefit of it while the loan is outstanding.

Who can write a gift letter for a mortgage?

In general, anyone can give a gift letter for a mortgage. But the gift letter must have certain information to be accepted. It should contain important information such as:

The names of the giver and receiver, including contact info for both
A note that a gift is being given or that money has been borrowed with no interest charged
The full amount of the gift or loan
The date the money is to be given
The signature of the giver and receiver or a witness if they cannot sign their names
A photocopy of the donor's identification, such as a driver's license
A note from your loan officer accepting your gift letter, if applicable

Does a mortgage gift letter get reported to the IRS?

The recipient of your gift does not have to report it to the IRS or pay gift or income tax. However, if you gifted a person with something that has a value of more than $10,000 in a year, you must report it to the IRS.

Are gift letters legally binding?

A gift letter becomes legally binding when signed by the parties involved. If you use a written form, it is important to make sure that the document has all the following characteristics to be an essential document in legal proceedings:

A clear statement of what is being gifted. You can mention not only cash or property but also insurance policies, furniture, jewelry, shares or stocks, and others in your gift letter. The value of each item must be included beside it.
The donor must also specify the mode of transfer of ownership in case of immovable property. If it is "as is where is", you cannot later claim that the property had a different value when it was gifted. The donee can, however, contest this if there has been a willful misrepresentation by the donor about the property.
You must indicate whether the gift letter will be used for claiming tax deductions or not. If you're writing a gift letter just for your own records to track estate/gift transactions, it is okay to mention that you are not claiming any deductions. On the other hand, if you're writing a gift letter for someone else or filing tax returns, it should be clear that these taxes are being claimed.
The gift letter must include the date of the gift transaction. It must also have the donor's signature with contact details. The donee must also sign and date the letter. Both donors and donees must keep a copy of the gift letter for their reference.

What happens if you pay back a gifted down payment?

You cannot pay back a mortgage gift because it is illegal. It is a gift and must remain a gift. You may not claim it as income. Moreover, if you did claim it as income, the donor would be liable. Even if you could pay back the gift to the donor, they should never ask for their money back.

How much money can be gifted for a home purchase?

Can my boyfriend gift me money for a house?

In general, lenders would not allow you to use a cash gift from just anyone to buy a house. A cash gift means that you are able to pay for the entire house without having to take out a loan. Lenders want their borrowers to leave room for them to have some sort of protection if there is a loss of income or something else goes wrong with your ability to repay the loan on time. Thus, it is advisable to receive gifts from your spouse, parents, siblings, children, or anyone other than your domestic partner. Some lenders may allow you to use the money from a third party if it is readily available in an account set up by that person, but they won't want to know who the person is. So using the cash gifts for buying property will not be followed with many questions asked.

Can my parents give me money for a house deposit?

Anyone can gift you money for a house deposit, so yes; your parents give you money for a house deposit. Many mortgage lenders prefer if the person gifting you the money for the deposit is a relative, such as a parent, grandparent, sibling, children, or other close relatives.

If you are considering asking someone to gift you deposit money for a home loan, it is important that they understand what will be expected of them, the types of risks involved, and how this transaction will impact their own wealth. It can sometimes work out to be risky for your family members if they are not educated or familiar with the process. This is not an easy transaction to undertake, but if you can work it out, it can save you tens of thousands of dollars in interest repayments over the life of your home loan.

Do I have to prove where my deposit came from?

You may be required to have proof of where your mortgage deposit came from in order to get a home loan since the deposit did not come from your own savings or bank account.

One of the most common ways to fund a deposit for buying property is through gifts from parents or relatives. You will need to provide proof that this gift was given, including all transaction details and paperwork if required by your bank. The same holds true with any 'windfalls' you have received in recent years, such as being awarded damages by a court, money from an inheritance, or a bonus at work.

What is a mortgage deposit for?

A mortgage deposit is defined as a sum of money that a borrower puts towards the purchase price of a property. The deposit is usually given to the seller at closing either as cash or added to the mortgage amount if financing has been secured.

Why do I need a gift letter for a mortgage?

You need a gift letter for a mortgage to prove to the financial institution that you will not be using your own money for the down payment. Moreover, it serves as an explanation of where the money is coming from. It also helps to lower your debt-to-income ratio, which can improve your chances of getting approved for a mortgage. The lender can ask for different kinds of gift letters, depending on what you use the funds for.

What to include in a gift letter for a mortgage?

A gift letter for a mortgage should include the following information:

The name, address, and telephone number of the person preparing the letter
The full name and mailing address of the individual or entity receiving the gift
An explanation as to why a gift is being given, such as a down payment on the purchase of property, towards closing costs
The dollar amount of the gift, which should be written in both words and figures
A statement that the funds are truly a gift
The date on which the gift was or will be given
If more than one individual is giving a gift to the borrower, it must list the name of all individuals involved with funding the gift
A gift letter for the mortgage should be signed and dated by the person making the gift and it is beneficial if they print their name beneath their signature and include their contact information. If a gift consists of more than one individual, all individuals involved with funding the gift must sign.
If a gift is from an individual under 18 years of age, it must include a statement to that effect
Signatures and date.

What is required in a gift letter?

A gift letter requires that a donor must sign a letter of intent to give a specific amount of money to the intended recipient. It is important for donors and charity organizations to keep track of any transactions they make. In general, most charities will find it more beneficial if the individual handing over the donation letter can also attach bank statements or personal financial records that prove they claim to have the said amount of money in their possession.

What is the purpose of a gift letter for a mortgage?

The purpose of a gift letter for a mortgage is to verify that the funds to be used for the purchase are a gift and not a loan, which would need to be repaid. Moreover, it confirms that the donor is aware of their responsibility for taxes on any capital gains earned when the property is sold. The letter also protects both buyer and seller by ensuring that neither will be held responsible for misrepresenting facts surrounding the transaction.

Where to submit a gift letter for a mortgage?

Once the form has been completed and signed, you should deliver it to your lender as a part of your overall application paperwork. Your lender must review all your paperwork, including the letter.

What are some tips about gift letters?

Before using a gift letter for a mortgage, check which specific loan program applies to you based on the amount of gift fund you received.

VA gift funds - Home loans for eligible active and retired military borrowers. VA loans do not require a down payment.
USDA gift funds - Loans through the U.S. Department of Agriculture’s mortgage program. Require no down payment. Fannie Mae gift funds- the most common type of home loan in the U.S. The minimum down payment is 3% and the entire amount can come from a gift for a one-unit primary residence. A 5% minimum down payment from your funds is required if you’re buying a two- to four-unit property.
Freddie Mac gift funds - Your entire down payment can be gifted by a relative if you’re buying a single-family home as your primary residence. You’ll need to come up with up to 3% of your down payment funds if you’re purchasing a two- to a four-unit property with less than 20% down.
FHA gift funds - Loans made by FHA-approved lenders and allow the entire 3.5% down payment to be gifted

Keep in mind that the Internal Revenue Service (IRS) taxes gifts made over a certain dollar amount. Gifts up to $15,000 per person may be lent without any tax penalty. In most cases, the donor has to pay the gift tax, but there may be special cases when the person receiving the gift can agree to pay the tax instead.

Your gift letter has to be backed up with documentation. Keep a copy of the following:

Copy of a check made out directly to the closing agent
Copy of the settlement statement
Copy of the gift check and deposit slip showing funds deposited into your account
Copy of the withdrawal slip showing the funds leaving the donor’s account

If you are buying an investment property, gifts are not permitted. All of the funds for investment purchases must come from your own money.

To ensure that your application will be approved, make sure that the people who lend are allowed to give down payment gifts.

For conventional loans, only the following are allowed:

Immediate family members: parents, grandparents, siblings, and spouses
Soon-to-be family members: domestic partners, engaged couples, and future in-laws

For FHA loans, you can receive money from the following:

Family members
Friends (with a documented interest in the borrower)
Employers
Charitable organizations

You are not allowed to receive money from anyone with a vested interest in the sale of the house such as the seller, real estate agent, or the builder.

Make sure that all information supplied was factual and true. Section 1014 of Title 18, United States Code, covers the knowing making of false statements or willfully overvaluing any property or security to influence in any way the action of the enumerated agencies and organizations. Generally, the making of several false statements to a lending institution is a criminal violation.

You have to prove where your deposit came from. Some of the sources that are always nearly accepted are the following:

Personal savings - Keep proof in the form of bank/saving account statements so there is evidence of the increasing balance over time.
Sale of a house - Prepare proof that the property proceeds are not undercharged by someone else. There must also be evidence of these funds in your bank account at the time of completion.
Capital from another property
Inheritance - Prepare a letter from the executor detailing the amount you are receiving, and evidence of the funds in your account.

Gift letters can vary slightly depending on if they will be provided to the lender and/or accompany your board application package. If you are not given one, this form will do. If you are planning to use a gift toward purchasing a condo or co-op, it is always encouraged to bring it to the attention of your real estate agent or real estate attorney as soon as possible. This ensures you have advice on requesting the appropriate language in your gift letter as well as any additional documentation needed.

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