How to Use a Down Payment Gift Letter
Point of Interest
If you’re dreaming of homeownership but struggling to save enough money for your down payment, you’re not alone. The median home in the US costs $217,600 in 2018, according to the US Census Bureau. A 20% down payment for a home that price would be a cool $43,520. If you don’t have that kind of cash on hand, the answer to homeownership might be a cash gift along with a mortgage gift letter.
You can accept a cash gift from people in your life and use that money as all or part of your down payment and closing costs to help make your home dreams a reality. However, the gift-giver will need to provide a gift letter that you can give to your lender to prove that the funds are officially and legally yours.
What is a gift letter for a mortgage?
A gift letter for a mortgage is a letter to your lender from the person who gifted you the money stating that the money is a gift that does not need to be paid back. This helps show your lender that your available cash is truly going to be used for your down payment and that no one else has any claim on it, nor do you have to repay it.
Generally, a gift letter includes:
- Your donor’s name, address, and phone number
- The donor’s relationship to you (parent, grandparent, etc)
- The exact gifted amount, and a full sentence stating that you as the borrower don’t owe the donor anything for the money
- The date the gift amount was transferred
- The address of the property that the mortgage is for
- Signatures from you and the donor
It’s important to note that you cannot, under any circumstances, repay a gift for a down payment. That would be considered mortgage fraud. It’s also important to note that gifts over the amount of $15,000 from one individual to another will be eligible to be taxed.
For example, your mother can gift you $15,000 and your father can gift you $15,000 and they will not pay the gift tax on either gift. But if your mother gives you $15,001, she will have to pay the gift tax on that $1.00. The donor always incurs the tax responsibility. These annual tax exclusion rates change year over year, so make sure to check the rates before anyone gives you a cash gift.
How to use a gift letter for a mortgage down payment
Once the letter has been written, you should deliver it to your lender as a part of your overall application paperwork. Some lenders may require additional forms to accompany the gift letter. The letter should be included with other financial information, like your list of assets, your income, and your work history and current work status. Your lender will review all your paperwork, including the letter.
Lenders may ask for additional bank statements from your gift giver, to ensure that they have the money to give and that that the money was transferred on the date stated in the letter.
Who can give me a down payment gift?
The people who can give you down payment gift will depend on the type of loan that you’re using. Different types of loans have their own rules to qualify for them.
With VA, USDA and FHA home loans, the gift money can come from anyone who doesn’t have an ownership stake in the property that’s being purchased. The money can come from a friend, any family member, your employer or even an approved nonprofit agency or charity.
For a conventional home loan through Fannie Mae, down payment gifts can come from a relative, defined as the borrower’s spouse, child or other dependents, or by any other individual who is related to the borrower by blood, marriage, adoption or legal guardianship. The money can also come from a fiancé or domestic partner. The money can’t come from anyone with any stake in the house, or who is affiliated in any way with someone who is part of the transaction, like the real estate agent or the builder.
Types of loans that allow gift letters for down payments
Conventional loan (Fannie Mae)
If you’re using a conventional loan from Fannie Mae, you can use a gift letter for your personal or secondary home, but you can’t use a gift letter on a conventional loan for an investment property. The gift itself can cover all or some of your down payment or closing costs. There is no limit to how much of your down payment can come from a gift for a Fannie Mae loan.
Loans from the Veterans Affairs office are eligible for a gift letter. The gift can be used to cover both closing costs and the down payment.
An FHA loan allows for both the down payment and closing costs to be paid for by a gift.
Gifts for a USDA loan can be supplied from “an organization or another person not living in the house” and require both a gift letter and for the applicant to fill out Form RD 3550-2.
The Final Word
A gift letter for a mortgage is a necessary part of your home loan application if you’re using gifted money for some or all of your home purchase. If you want to use a financial gift for your down payment, your next steps should be to ask the person giving you the money to write a gift letter. You may also consider keeping the gift money in a separate bank account, both to keep your finances organized and to preserve that money for your actual home purchase.