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A gift letter is a form signed by you and the person who's giving you money towards your mortgage loan. It states how much you're getting and from whom, making it clear that you don’t need to pay back the gift money, since it’s not a loan.

Making a down payment is often one of the toughest hurdles homebuyers have to cross. Even if you aren't aiming for the recommended 20% down, you'll typically need several thousand dollars in cash, plus more for closing costs. 

But if you're fortunate enough to have family members or friends who are able and willing to help you buy a home, you might be able to use gift funds to make your down payment. Using a gift may require doing some additional paperwork, because mortgage lenders will probably ask you to get a gift letter to document where that money came from.

Why do mortgage lenders verify gifts?

Your lender needs a paper trail for the gift money you're using for your down payment. They have to confirm that the cash in your bank account actually belongs to you and that you acquired it legally.

Gift letters are one of the essential documents you’ll need for your mortgage application, and they’re important to:

Establish your relationship to the gift-giver

A gift letter allows the lender to verify the relationship between you and the donor. You generally aren't allowed to get help with your down payment from someone who has a financial interest in the sale, like a real estate agent. Depending on the type of mortgage you're applying for and your lender's rules, there may be additional restrictions on who can make a gift.

Getting a gift letter assures the mortgage lender that the gifted money is from an acceptable source, and that you aren't borrowing additional funds without telling them about it.

Make sure the gift money it’s not a loan 

Lenders also want to make sure that whoever is helping you with your down payment doesn't expect you to pay them back. In other words, they need to check that you aren't taking out a second mortgage under the table.

While it's sometimes possible to borrow money for your down payment with a "piggyback" loan, lenders need to know if you're doing this. A piggyback loan adds to your debt, and mortgage underwriter need to compare your debt to your income to determine if you can afford the loan you're applying for. Plus, borrowing to cover your down payment increases the risk that you won't be able to pay back what you owe, and lenders usually want to see an excellent credit score and high earnings before they'll allow you to use a piggyback loan.

What's included in a gift letter?

A gift letter should include the contact information for both the donor and the homebuyer, and it should state the relationship between them. It should specify the property that's being purchased, provide the gift amount, the date it was given, and state whether the funds are meant for an earnest money deposit or down payment. (If you're receiving a gift of equity, you'll need a letter for that, too. Just include the equity amount instead of gift funds.)

The letter should say that the gift funds doesn't have to be paid back. It might also include a statement that the funds aren't coming from anyone with a financial interest in the purchase.

Finally, both the donor and the recipient sign the letter and include the date of their signature.

Instead of writing a gift letter from scratch, you should typically get a form from your lender. It's best to stick to this form because gift letter requirements can vary a bit between lenders, and you want to make sure you're including all the necessary details and using your lender's preferred wording. 

A template can give you an idea of what a gift letter looks like.

Mortgage gift letter template

[Date]

[Lender name]

[Lender address]

I, [Donor], am giving [Recipient] a gift of [dollar amount] on [date]. I intend this gift to be used toward a down payment for the purchase of a home at [address], and it [is/is not] to be used as earnest money.

I am [Recipient]'s [relationship to recipient]. I do not expect any repayment of this gift. 

I certify that I have not received funds from any parties with interest in the sale. 

[Donor signature]

[Donor name]

[Date]

[Donor address]

[Donor phone number]

[Recipient signature]

[Recipient name]

[Date]

[Recipient address]

[Recipient phone number]

How do you get a gift letter?

To get a gift letter, ask your loan officer for a copy of the form for you and the donor to sign. The loan officer should tell you what other documents they need to accompany your gift letter, such as the donor's bank statement or a record of the wire transfer.

Next, ask the donor to fill out and sign the gift letter. Check that the information is correct, and sign and date it yourself. Then, bring the gift letter and any supporting documents to your lender.

Compared to all the other forms you're asked to fill out when you apply for a mortgage, a gift letter is usually fairly short and easy to complete. You just want to make sure to get it signed promptly so your lender has the documentation they need.

Lenders usually require documentation for money you've received in the last 60 days. If, for example, you got a gift from your parents a couple weeks before applying for a mortgage, lenders will probably ask for a gift letter. The same goes for depositing a check while your application is being reviewed.

If you're getting gifts from multiple people, you'll need a separate gift letter for each one.

Related: Here's a step-by-step guide to buying your first home

Is there a limit to mortgage gifts?

There's usually no maximum dollar amount that a donor can contribute to help you buy a home. But depending on the type of mortgage you're applying for, you might have to use at least some of your own money towards the down payment.

Conforming loans

If you're getting a conforming loan, you can use a gift to cover your entire down payment on a single-family home that will be your primary residence. You can also make a down payment on a second home using only gift funds as long as the down payment amounts to at least 20% of the home's value. However, if you're buying a second home and putting less than 20% down, you'll have to contribute at least 5% yourself without help from a donor. And at least 5% must come from your own funds if you're buying a two- to four-unit property and putting less than 20% down. 

If you're buying an investment property, you cannot use any gift funds.

Non-conforming loans

For non-conforming conventional loans, limits on gifts are up to the mortgage lenders. Some lenders may require that a certain percentage of the down payment comes from your own funds.

Government-backed loans

There's no limit on gifts to fund a down payment on an FHA loan. VA loans typically don't call for a down payment, but you can use gifts to cover the full amount of the VA funding fee. And you can use gifts to cover the entire amount you owe at closing for a USDA loan.

Do you need to report mortgage gifts to the IRS?

If you receive a mortgage gift you don't need to report the money on your tax return, but the gift-giver might.

Whenever someone gives a large monetary gift, they need to be aware of the annual exclusion, which limits how much a person can give without filing a gift tax return. If the gift amount is larger than the annual exclusion for the year, the person giving the money needs to report it to the IRS. The gift will then typically count toward their lifetime exemption, or the total amount of gifts the IRS allows a person to give before they owe gift taxes. 

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