Gift Letters for Mortgages: How Do They Work?
5 Min Read | Published: October 3, 2024
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When you are applying for a mortgage, the lender will need to know that your down payment funds are your own and not a loan. A gift letter can show this.
At-A-Glance
- It may be fine to receive funds to help you buy a home, but mortgage lenders may require a mortgage gift letter to verify the source of the funds and show that they’re not a loan.
- Mortgage gift letters should also show that the gift-giver has no financial stake in the property, as a real estate agent or home builder might.
- Mortgage lenders may also look at your debt-to-income ratio when evaluating your creditworthiness. Gifts are not part of that equation.
When you’re applying for a mortgage, the lender will typically need to verify all aspects of your finances before approving you for a home loan. That includes confirming where your down payment funds came from. If you were fortunate enough to have received a gift toward the down payment, then you may need a mortgage gift letter proving it was not a loan. Fortunately, these letters are easy to create. In this article, we’ll look at how a gift letter works, see whether you need one in the first place, and show you how to create one.
What Is a Gift Letter?
A gift letter is a document confirming that a financial gift was provided for a home purchase, typically towards the down payment or in some cases, the closing costs. The gift letter confirms that the gift was not a loan and does not need to be repaid. It should also show that the gift-giver has no financial stake in the property, as a real estate agent or home builder might.
Mortgage underwriters review bank account statements, tax documents, and W2s to determine whether you can afford a mortgage. They also look at your debt-to-income ratio, which is your monthly debt payments divided by your gross monthly income.1 A private loan arrangement could skew those numbers, so lenders may ask for a gift letter, to show that the funds are indeed a gift.
What Should a Gift Letter Should Include?
There are several online templates for gift letters, but you should ask the mortgage lender for their requirements before composing your letter. According to Fannie Mae, a gift letter for a mortgage should include the following information:2
- The dollar amount of the gift
- A statement that repayment of the gift is not required
- The gift-giver’s name, address, and telephone number
- The gift-giver’s relationship to the homebuyer
Do You Need a Gift Letter?
Your mortgage lender will inform you if you need a gift letter. If the funds are given to you in several installments, the lender may also require you to have a gift letter for each installment. Underwriting is extremely detailed and takes time, so be patient. Their objective is to confirm the source of your funds and make them as transparent as possible.
Gift Letter Requirements
The requirements for a gift letter are dictated by a few factors, including the type of loan that you’re getting, occupancy type, property type, and the amount that can be gifted.
The chart below shows a breakdown of gift letter guidelines for buying a one-unit home (not an investment property):
| Type of Loan | Occupancy | Gift Amount |
|---|---|---|
| Conventional | Primary Home | Down payment, closing costs, and reserves |
| Conventional | Second Home | Down payment, closing costs, and reserves |
| FHA | Primary Home | Down payment and closing costs |
| VA | Primary Home | Down payment and closing costs |
| USDA | Primary Home | Down payment and closing costs |
There may be limitations on how much of the down payment can be given as a gift. For primary homes with two to four units and conventional mortgage loans, gifts of 12% of the 15% required down payment or 22% of a 25% down payment are allowed.3
Who Can Gift Money for Down Payments?
The type of mortgage that you have will also impact the gift-giving rules. For conventional loans, the acceptable sources for conventional mortgages are family members and romantic partners. Gifts for Federal Housing Administration (FHA) loans can come from family members, friends, employers, labor unions, or charitable organizations. Veterans Administration (VA) loans don’t have down payments. United States Department of Agriculture (USDA) loans do not have down payment requirements either, but allow gifts for closing costs, and gifts can come from anyone who doesn’t have an interest in the transaction.4
You’ll also want to explore your options carefully when shopping for a mortgage. For those who are eligible, government-backed mortgages (VA, USDA) come with low or no down payments. FHA loans may require just 3.5% down. You may want to check to see if you’re eligible for any of these programs first before accepting a gift for a down payment.
Frequently Asked Questions
Mortgage lenders may need gift letters to prove where the money for your down payment comes from. A gift letter shows that the gift was not a loan and should also show that the gift-giver has no financial stake in the property.
Anyone who is giving or receiving a gift should be aware of the potential tax implications. The Internal Revenue Service (IRS) has rules governing the tax liabilities of gift-giving. For instance, the donor may have to pay taxes and file a gift tax return on amounts that are above a certain amount. This amount can vary from year to year. Be sure to visit the IRS website Gift Tax page to learn more.
The Takeaway
It may be fine to accept a gift to buy a home, but the mortgage underwriters may want a gift letter to prove where the money came from. There are also rules surrounding who is allowed to gift money for a down payment, how much they can gift, and what the funds can be used for. This will vary, depending on the loan, type of property, and more. Be sure to research the rules carefully before accepting a gift for your mortgage.
1 “What is a debt-to-income ratio?,” Consumer Financial Protection Bureau (CFPB)
2 “Personal Gifts,” Fannie Mae
3 “How to Complete a Gift Letter for a Mortgage Down Payment,” Lending Tree
4 “Rules for Giving and Receiving Home Down Payment Gifts,” Experian
Kevin D. Flynn is a financial services provider, business coach, and financial writer. He lives in Leominster, Massachusetts, with his wife Evelyn, two cats, and ten wonderful grandchildren.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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