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How to Complete a Gift Letter for a Down Payment on a Mortgage

Are you in the market for a new home but need help with your finances? If so, you may wonder about gift letters and how to complete them. A gift letter is a written statement that ensures the lender that the gift funds are not a loan. Therefore, the person who gifts you the funds must write and sign the gift letter and provide their personal information. Although completing a gift letter may seem complicated, it’s pretty simple. In this blog post, we’ll walk you through everything you need to know about gift letters and how to complete them. So, if you’re ready to take the next steps in buying a house, keep reading.

What is a gift letter for a mortgage?

A gift letter used for a mortgage is a formal statement that money is gifted for the down payment and is not a loan that must be repaid. Additionally, the letter must reflect the donor’s name, address of the property, the dollar amount of the gift, and the relationship between the recipient and the donor.

Gift funds can be used to pay the down payment and closing costs, which average between 1% and 4% of your mortgage amount. In addition, loan programs allow you to use the gift money to meet mortgage reserve requirements, funds set aside to cover several monthly payments after closing.

Gift letter template for a Mortgage

Mortgage lenders generally provide a gift letter template for you to use and share with the donor(s). In addition, follow the basic instructions on this gift letter to fill out the form, and be sure you understand the fine print.

How to document gift funds for a mortgage

You will need to document the transfer of gift funds – below are several ways you can do this:

  • The donor can wire the gift funds directly to the title company. Above all, this option does not require documentation where the items below do.
  • A copy of the gift check and deposit slip showing the funds were deposited into your account.
  • The bank statement or withdrawal slip showing the gift funds leaving the donor’s account.
  • A copy of the check that’s made out directly to the closing agent. Make sure to include the escrow number on the check.

How much can you receive as a gift for a mortgage?

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

Who Can Gift Down Payment Funds?

You can receive a gift from a relative, which is 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; or 
  • a fiancé, fiancée, or domestic partner. 

Generally, lenders won’t allow you to receive a cash gift from any of these donors.

Are there Tax Implications for the Gifter of a Down Payment

The IRS does impose a gift tax on certain gifts, and the tax is paid by the person who donates the money rather than the one who receives it. As of 2022, you can gift up to $16,000 to one person without incurring this tax. However, if you’re married and filed a joint tax return, you and your spouse can gift up to $32,000 to a child or another family member. There are no restrictions on how many people you can give these gifts to each year.

In some cases, both parties may agree to have the person receiving the gift pay for the tax. Therefore, if you think this may be for you, it would be wise to speak with your accountant about the tax liability.

Gift letter rules for different loan types

Fannie Mae gift guidelines

Lenders follow the guidelines established by Fannie Mae on conventional loans, which are the most common type of home loan in the United States. Conventional loans require a minimum down payment of 3%, which can come entirely from a gift if you’re purchasing a single-family residence.

The gift funds for a conventional loan can come from a relative, employer, close friend, government down payment assistance, or a charitable organization.

Freddie Mac gift guidelines

Freddie Mac also provides funding for conventional loans. Per Freddie Mac guidelines, the entire down payment can be gifted by a relative, assuming you’re purchasing a single-family home that’s your primary residence. You may also use wedding gift funds from friends and relatives:

  • Provide a copy of your marriage license
  • You show that the funds are being deposited within 90 days of your marriage license date

FHA gift guidelines

The FHA (Federal Housing Administration) insures loans with a minimum 3.5% down payment, which can be gifted. Likewise a gift letter is required, along with acceptable documentation reflecting the transfer of gift funds.

FHA loans offer a minimum credit score of 580 to qualify, which is lower than the 620 needed for a conventional. FHA is a popular loan with first-time homebuyers.

VA gift guidelines

The Department of Veterans Affairs (VA) guarantees mortgage loans for eligible military borrowers. VA loans don’t have a down payment requirement, but they allow borrowers to receive gift funds toward closing costs and/or the down payment. The gift letter documentation requirements are similar to conventional loans.

USDA gift guidelines

The Department of Agriculture (USDA) offers no-down-payment on USDA loans to borrowers with low-to-moderate incomes and is located in approved rural areas. In contrast to VA, gift funds can be used to pay closing costs. Likewise, you’ll need to write a gift letter and supporting documents consistent with the gift letter rules of other loan programs.

Using a Gift towards reserve requirements 

Some lenders require “mortgage reserves,” which are extra cash assets left over after closing to cover monthly mortgage payments. Therefore, the lender will provide you with the number of months reserves that would be required. Whereas conventional loans allow you to use gift funds for reserves. However, FHA and VA loans don’t allow gift funds to be used towards reserves, so you may need to save additional funds.

Gift letter requirements based on property types

Suppose you purchase a one-unit (single-family) property as your primary residence. In that case, you are eligible to receive a gift for your entire down payment under the terms of the loan programs described above. But other programs require that you pay all or a portion of the down payment out of your own pocket, particularly if you’re purchasing a multifamily property, a second home, or an investment property.

With this in mind, use the chart below to quickly reference the different property types’ gift letter requirements.

Loan programOccupancy typeProperty typeAmount that can be gifted
ConventionalPrimary homeOne unitDown payment, closing costs and reserves
Two unitsUp to 12% of the 15% required down payment
Three to four unitsUp to 22% of the 25% required down payment
Second homeOne unitDown payment, closing costs and reserves
Two to four unitsAll but 5% of the down payment requirement
Investment propertyOne to four unitsGift funds not allowed
FHAPrimary homeOne to four unitsDown payment and closing costs
VAPrimary homeOne to four unitsDown payment and closing costs
USDAPrimary homeOne to four unitsDown payment and closing costs
gift requirements for different loan programs and property types

What is a gift of equity letter?

A gift of equity allows the seller to gift a portion of their home’s equity. In addition, they must be a family member, fiancé or fiancée, or a domestic partner. Instead of using a gift letter, you would need a gift of equity letter.

With a gift of equity letter, the following applies:

  • The gift would represent the amount of equity that the seller gives to the buyer of the home.
  • The documentation requirements are similar to a gift letter.
  • There is not an exchange of money, rather equity.
  • The equity is a credit to the buyer at closing.

Here’s a quick rundown of the gift of equity rules, depending on the loan program:

  • Conventional. A gift of equity can only be made to a relative, fiancé, fiancée or domestic partner.
  • FHA. A gift of equity is allowed for home sales between family members only.
  • VA. The VA doesn’t allow gifts of equity.
  • USDA. The gift of equity must reduce the home price.

Why Choose Metropolitan Mortgage?

Metropolitan Mortgage has been in business since 1997, and we have assisted many home buyers in the Midwest. If you are looking for mortgage financing in Overland Park and the greater Kansas City metropolitan area, we can help. Metropolitan Mortgage offers mortgage programs in Kansas and Missouri.

Contact us if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply directly from our website.

Rick Woodruff
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