Nov 16, 2022
While we adhere to strict editorial guidelines, partners on this page may provide us earnings.
Let's say you're ready to buy your first home — but your bank account isn't. If you don't have the down payment money, you can get help from a friend or family member to secure a mortgage.
What the mortgage lender will need from you is known as a gift letter.
Advertisement
More: Compare current mortgage rates
What is a gift letter for a mortgage?
A gift letter for a mortgage is a note from your donor declaring that the down payment funds have been given to you as a gift. It shows a mortgage lender that you're under no obligation to pay the money back.
The lender wants to know that when you agree to make your monthly home loan payments, you won’t face the additional financial stress of having to pay back the donor. That could make you more prone to falling behind on your mortgage.
Mortgage lenders prefer that you owe your house to them and no one else. A lender may require your donor to provide a bank statement to show that the person had cash to give you for your down payment.
The gift letter may allow the donor to avoid paying a hefty federal gift tax on the transfer. Without the letter, the IRS could tax the donor for up to 40% on the gift amount.
Must Read
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and the simple steps to fix it ASAP
- Robert Kiyosaki begs investors not to miss this ‘explosion’ — says this 1 asset will surge 400% in a year
- Vanguard reveals what could be coming for U.S. stocks, and it’s raising alarm bells for retirees. Here’s why and how to protect yourself
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
What to include in a gift letter for a mortgage
The gift letter must include:
- Name of the mortgage borrower
- Donor's name, address, and phone number
- Donor's relationship to the borrower
- Amount being gifted
- Statement that the gift is not to be paid back (after all, then it's not a gift!)
- Address associated the down payment
Mortgage gift letter template
[Date]
To whom it may concern,
I, John Doe, hereby certify that I will give a gift of $5,000 to Jane Doe, my sister, on July 1, 2022 to be applied toward the purchase of the property at 123 Main Street.
Advertisement
I certify that this payment is a gift and that there is no obligation, either expressed or implied, of repayment. No part of this gift was provided by a third party with an interest in buying the property, including the seller, real estate agent and/or broker.
I have given the gift from the account listed below, and have attached documentation to confirm that the money was received by the applicant prior to settlement.
The source of this gift is:
[Type of account]
[Name of financial institution]
Sincerely,
Advertisement
John Doe
[Signature]
321 Avenue Street
Anytown, CA
(123) - 456 - 7890
Mortgage gift rules and restrictions
Note that the tax agency puts other limits on money gifts from one person to another. During 2022, a family member can give you up to $16,000 without any tax consequences. The lifetime limit in 2022 is $12.06 million.
Amounts exceeding the limits are subject to the up-to-40% gift tax.
For conventional mortgage loans, a down payment gift generally must come from a family member. Anyone in a special relationship with the homebuyer — such as godparents or close family friends — must provide evidence of the relationship.
Advertisement
When making down payments of less than 20%, gift-recipient homebuyers must pay at least 5% of the sale price with their own funds. The remaining 15% can be paid with gift money.
Down payments exceeding 20% may be paid totally with gift money. Before you borrow, check mortgage rates in your area.
Read More: Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
Gift rules for other types of mortgages
The rules can be a bit different with low-down-payment or other mortgage loans.
VA home loans, available to active members of the U.S. military and veterans, require no down payment. But the borrower may choose to make a down payment — and it can come entirely from cash gifts.
USDA loans, offered to homebuyers in rural and some suburban areas, also do not require a down payment. As with VA loans, USDA mortgages allow the option of making a down payment, and all of that money can come from gifts.
FHA mortgages offer down payments as low as 3.5% and flexible mortgage benefits. With an FHA loan, mortgage down payment gifts can come from both friends and family members.
Remember that any gift requires a gift letter to reassure your lender that you don't owe the money.
You May Also Like
- Turning 50 with $0 saved for retirement? Most people don’t realize they’re actually just entering their prime earning decade. Here are 6 ways to catch up fast
- This 20-year-old lotto winner refused $1M in cash and chose $1,000/week for life. Now she’s getting slammed for it. Which option would you pick?
- Warren Buffett used these 8 repeatable money rules to turn $9,800 into a $150B fortune. Start using them today to get rich (and stay rich)
- Here are 5 easy ways to own multiple properties like Bezos and Beyoncé. You can start with $10 (and no, you don’t have to manage a single thing)
Doug Whiteman was formerly the editor-in-chief of MoneyWise. He has been quoted by The Wall Street Journal, USA Today and CNBC.com and has been interviewed on Fox Business, CBS Radio and the syndicated TV show "First Business."
Mortgages • Apr 17
What is a home equity line of credit (HELOC)?
Mortgages • Mar 19
