What Is a Gift Letter for Real Estate?

Lender Requirements for Gifted Funds

A gift letter serves as a formal declaration, documenting funds provided by a donor to a recipient for a real estate transaction. It explicitly states the funds are a gift for a home purchase, not a loan requiring repayment. Its purpose is to clarify the funds’ nature for lenders, ensuring they contribute to the home purchase without creating additional debt.

Mortgage lenders require a gift letter when a portion of home purchase funds originates from a gift. Lenders accurately assess the borrower’s debt-to-income ratio. If gifted funds were a disguised loan, it would inflate the borrower’s true financial obligations, potentially jeopardizing their ability to repay the mortgage. Lenders must ensure the funds genuinely represent a gift, preventing undisclosed liabilities.

Lenders also operate under strict anti-money laundering regulations, verifying the source of all funds. The gift letter helps lenders comply by providing transparency regarding the origin of the gifted money. This protects the lender and financial system. The requirement for a gift letter stems from the lender’s need for financial clarity, risk management, and regulatory adherence.

Essential Elements of a Gift Letter

A gift letter must contain specific information. The letter should clearly state the full name, current address, and contact telephone number of the donor. Similarly, the full name of the recipient must be included, along with the complete address of the property being purchased with the gifted funds.

The exact monetary amount of the gift must be written numerically and in words. The letter must contain an unequivocal statement affirming that the funds are a gift and no repayment is expected. Additionally, the letter should specify the relationship between the donor and the recipient, such as parent-child.

Supporting documentation is also a required accompaniment to the gift letter. Lenders commonly request recent bank statements from the donor to demonstrate the availability of the gifted funds in the donor’s account. Furthermore, documentation proving the transfer of funds from the donor to the recipient’s account will be necessary. These documents provide a complete financial picture, allowing the lender to trace the funds.

Submitting and Verifying Gifted Funds

The prepared gift letter and supporting documentation should be submitted to the mortgage lender. The completed gift letter, along with the donor’s bank statements and proof of fund transfer, should be provided to the loan officer.

After receiving the documentation, the lender initiates a verification process to confirm the gifted funds. This often includes reviewing the donor’s bank statements to ensure funds were available and the transfer occurred. In some cases, the lender may directly contact the donor to verbally confirm the gift.

The timeline for verification can vary, ranging from a few days to a week. Both the recipient and the donor should be prepared for potential follow-up questions from the lender, which may concern the source of funds or gift terms. Addressing inquiries promptly helps expedite verification and approval.