What Is a Gift Letter and When Do You Need One?

A gift letter is a formal document confirming that funds received are a gift rather than a loan. Its primary purpose is to clarify that the money does not need to be repaid. This distinction ensures financial transparency and helps to prevent misunderstandings about the nature of the funds.

Understanding a Gift Letter

Gift letters emphasize financial transparency, particularly for institutions like mortgage lenders. Lenders require this document to ensure the legality of funds and to confirm that a borrower’s down payment is not a hidden loan. Such a hidden loan could impact the borrower’s debt-to-income ratio, potentially affecting their ability to repay a mortgage. The letter helps lenders assess a borrower’s financial standing and mitigate risks.

The most common scenario requiring a gift letter is for down payments on real estate. Beyond real estate, gift letters can also be necessary for substantial contributions towards educational expenses or other large personal financial gifts. These documents provide a clear audit trail for the origin and intent of the funds, aiding compliance and fraud prevention.

Essential Information for a Gift Letter

A gift letter requires the inclusion of several mandatory elements to ensure its validity and acceptance by financial institutions. The letter must clearly identify the donor with their full legal name, current address, and contact information, such as a phone number. Similarly, the recipient’s full legal name, current address, and contact information should be provided.

The exact dollar amount of the gift must be stated both numerically and in words. A clear statement confirming that the funds are a gift and that no repayment is expected is essential. The letter should specify the relationship between the donor and the recipient, such as parent, grandparent, or close friend, as some lenders have restrictions on who can provide gifted funds.

The specific purpose of the gift must be outlined, such as “for the down payment on the property located at [full property address]”. The date the letter is written and signed is also a required element. Both the donor’s wet signature and, in some cases, the recipient’s signature are necessary for the document to be complete. While notarization is not universally required, it is often recommended by lenders for mortgage transactions.

It is important to note that for tax year 2025, an individual can gift up to $19,000 to any person without triggering federal gift tax reporting requirements. Amounts exceeding this annual exclusion will reduce the donor’s lifetime gift tax exemption, which is $13.99 million per individual for 2025, though a gift tax return (IRS Form 709) must still be filed.

How a Gift Letter is Utilized

Once a gift letter has been thoroughly prepared and signed, its utilization involves a specific procedural flow. The completed gift letter is typically submitted to the financial institution requiring it, such as a mortgage lender or a financial aid office, as part of a larger application package. This submission often occurs during the loan underwriting process, where the lender scrutinizes all financial documentation.

The receiving party then reviews the letter to verify the source of funds and ensure compliance with their specific lending or financial policies. Lenders may also request supporting documentation, such as bank statements from the donor, to confirm the availability and transfer of funds. This verification process ensures that the gifted money is legitimate and adheres to regulatory standards.

Both the donor and the recipient should retain copies of the signed gift letter for their personal records. Maintaining these copies provides documentation of the transaction for future reference or in case further verification is needed by tax authorities or financial auditors. This record-keeping helps to ensure transparency and accountability for both parties involved in the financial gift.