What Is a Gift Letter for Mortgage Down Payment?

A gift letter for a mortgage down payment is a formal document that confirms funds provided to a homebuyer are a gift and do not require repayment. This letter is a crucial part of the home-buying process when a portion or all of the down payment comes from someone other than the borrower. It provides transparency to mortgage lenders regarding the source of funds, ensuring the financial assistance is a gift and not a hidden loan. Without this documentation, lenders may question large deposits into a borrower’s account, potentially delaying or jeopardizing mortgage approval.

What a Gift Letter Is and Why It Is Needed

It assures mortgage lenders that money received by a homebuyer for a down payment is a genuine gift and not a disguised loan. Lenders require this transparency because an undisclosed loan would impact a borrower’s debt-to-income (DTI) ratio and their ability to repay the mortgage, which is a key factor in loan approval decisions. This documentation also helps lenders comply with regulations designed to prevent money laundering and verify the legitimate source of funds. By confirming no repayment is expected, the gift letter helps maintain a favorable financial profile for the borrower.

Most mortgage programs permit down payment gifts from immediate family members, including parents, grandparents, siblings, spouses, fiancés, and domestic partners. Some loan types, such as FHA and VA loans, may also allow gifts from employers, labor unions, charitable organizations, or close friends with a documented interest in the borrower. However, funds cannot be accepted from individuals or entities with a vested interest in the property transaction, such as the home seller, real estate agents, builders, or developers, as this creates a conflict of interest.

Essential Components of a Gift Letter

A valid gift letter must contain specific information to be accepted by mortgage lenders. These components include:
The donor’s full legal name, current address, and telephone number for verification.
The recipient’s (borrower’s) full name and the address of the property being purchased.
The defined relationship between the donor and recipient (e.g., “parent,” “grandparent,” or “sibling”).
The exact dollar amount of the gift, stated in both numerical and written form, and the date of transfer.
A definitive statement from the donor confirming the funds are a gift and no repayment is expected. This statement is crucial to distinguish the funds from a loan.
The donor’s attestation to the source of funds, such as confirming they originate from savings and not another loan.
Details of the donor’s bank, including the account number and type, if requested to trace the funds.
Signatures and dates from both the donor and recipient.

While some lenders may provide specific templates, these universal components are consistently required across most mortgage programs.

Managing and Submitting Gift Funds and Documentation

Once the gift letter is prepared, the next steps involve transferring funds and submitting supporting documentation to the mortgage lender. The money should be transferred in a manner that creates a clear and verifiable paper trail. Common methods include direct bank transfers from the donor’s account to the recipient’s, or directly to the escrow or closing agent. Wire transfers or cashier’s checks ensure a traceable transaction history.

Lenders pay close attention to “seasoned” funds, which refers to money that has been in the recipient’s bank account for a period, typically 60 days, before the mortgage application. Funds that are seasoned are generally viewed as the borrower’s own assets and may require less scrutiny. If the gifted funds are not seasoned, meaning they were deposited recently, lenders will require additional documentation to verify their origin and ensure they are indeed a gift. This additional scrutiny is to confirm the funds are not a short-term loan that could affect the borrower’s financial stability.

Lenders typically require several supporting documents with the gift letter. These include recent bank statements from the donor, which demonstrate sufficient funds and the withdrawal of the gifted amount. The recipient’s bank statements are also needed to show the deposit and receipt of the gifted funds into their account. Proof of transfer, such as a wire transfer confirmation receipt or a copy of a cleared cashier’s check, is also required to document the movement of the money.

All these documents, including the signed gift letter and supporting financial records, must be submitted to the mortgage lender or loan officer. It is advisable to submit these materials well in advance of the scheduled closing date to allow ample time for the lender’s review. The lender’s underwriting department will carefully examine all documentation to ensure compliance with loan program guidelines and to confirm the legitimacy of the gift. This thorough review process helps prevent delays in the mortgage approval and closing process.