What Is a Gift Letter for a Mortgage?
Understand the mortgage gift letter: a crucial document for using gifted funds for a home down payment. Learn requirements for lender approval.
A gift letter for a mortgage is a formal document confirming that funds provided to a homebuyer for a down payment or closing costs are a true gift, not a loan requiring repayment. This letter assures lenders about the source and nature of these funds, demonstrating a borrower’s financial capacity without undisclosed debt. It ensures transparency and compliance with lending regulations.
Understanding Gift Letters
A gift letter serves as a formal declaration from an individual or entity providing funds for a mortgage down payment or closing costs. Lenders require this document to ensure the funds are not a hidden loan that could impact a borrower’s debt-to-income ratio and repayment ability. This also helps lenders comply with anti-money laundering regulations by verifying the legitimate origin of financial contributions.
Eligible donors typically include close relatives such as parents, grandparents, siblings, and sometimes domestic partners. Loan programs have varying guidelines regarding who can provide gift funds. Funds generally cannot originate from anyone with an interest in the real estate transaction, such as the seller, real estate agent, or builder, to avoid conflicts of interest. The individual receiving the gift funds must be a party to the mortgage application.
Most mortgage types permit gifts for the entire down payment on a primary residence. Some conventional loans for second homes may require a portion of the down payment to come from the borrower’s own funds if the total contribution is less than 20%. For instance, a 5% personal contribution may be necessary. The IRS outlines annual gift tax exclusions; for 2025, an individual can gift up to $19,000 per recipient without needing to file a gift tax return. Amounts exceeding this threshold must be reported by the donor to the IRS, though taxes are typically not owed unless the donor has exceeded a significant lifetime exemption.
Preparing Your Gift Letter
The gift letter must contain specific information to satisfy lender requirements. This includes the donor’s full name, address, phone number, and relationship to the borrower. The letter should also state the borrower’s full name(s) and address.
A precise dollar amount of the gift must be specified. The property address for which the funds are intended should also be included, if known. A crucial element is an unequivocal statement affirming that the funds are a true gift and that no repayment is expected.
The letter must also include a declaration from the donor confirming that the funds are sourced from their own accounts and are not borrowed. Finally, the letter requires the date it was written and the original signatures of all individuals providing the gift.
Supporting Documentation for Gift Funds
In addition to the gift letter, lenders require documentation to verify the source and transfer of gift funds. Donors typically provide recent bank statements (30-60 days) to demonstrate fund availability. This confirms the funds are “seasoned,” meaning they have been in the account for 60 to 90 days, indicating financial stability.
Proof of fund transfer from the donor to the recipient is mandatory. Acceptable documentation includes wire transfer confirmations, certified checks, or cashier’s checks. Lenders generally do not accept cash gifts due to difficulty in tracing their origin.
The recipient’s bank statements are also required to show the deposit of gift funds. It is advisable for gift funds to be deposited into the borrower’s account well in advance of the mortgage application or closing date. This allows for seasoning and streamlines the verification process.
Lender Review and Verification
Once the gift letter and all supporting documentation are prepared, they must be submitted to the mortgage lender or loan officer. This typically occurs as part of the initial mortgage application or during underwriting.
The lender verifies the legitimacy of the gift funds. This involves reviewing bank statements for consistency with the gift letter and transfer records. Lenders may also contact the donor directly to confirm the gift and verify details.
Gift funds are factored into the borrower’s financial profile, influencing the loan approval process. Clear documentation ensures these funds are not misconstrued as additional debt, which would negatively impact the borrower’s debt-to-income ratio. Lenders understand how the funds contribute to the borrower’s ability to afford the mortgage.