Need help writing a gifted deposit letter for a mortgage? You've come to the right place. You may be looking to help out a friend or relative who is a first-time home buyer. And if you are the one who's in the market to purchase your first home, it's not uncommon to get some financial help from your family members or even close friends.
For such monetary gifts, most lenders typically require a written gift letter for down payment confirming that this money is indeed a gift and not a loan.
Before you draft the letter, it's important to understand why you need one and what you need to include in it so your lender accepts it.
At the end of this article, we've also included a down payment gift letter template to help you draft your own gifted deposit letter.
What is a gifted deposit letter for a mortgage?
Put simply, a gifted deposit letter for a mortgage is a formal letter stating that funds from a donor are a gift that never has to be repaid. So a gift giver can use their own funds to help someone else with their mortgage. A mortgage lender reviews this as part of the application package.
There are a number of key components a lender will look out for:
- The gift giver's name, address, and phone number
- The gift giver's relationship with the home buyer
- The precise dollar amount of the gift
- Funds transfer date
- A clear statement that this is purely a gift with no payback required
- Address of the property that the funds will be used for
- Payment method the gift giver is using for the transfer (bank account information, checks, etc)
To sum it up, as you write your "gift money for down payment letter", you want to make sure that it's detailed and precise. The clearer the information in your gifted deposit letter, the faster you will receive a response.
Keep in mind that a gift letter is different from a proof of funds letter, which the bank also needs to validate that you actually have the funds available. For this, you'll need things like bank statements and the total amount of funds.
Why does the bank ask for a gifted deposit letter?
You might be wondering why a lender asks for a gifted deposit letter in the first place.
Lenders want to ensure that the money the home buyer is receiving isn't any sort of loan.
Also, a person who has a high debt burden presents a much higher risk to the lender. They want to know that the buyer can pay back their mortgage.
That being said, someone who receives a portion of or all of their home downpayment funds as gift money is a completely different story. They would not owe anyone a payment which means a lower overall debt obligation.
If banks did not insist on a gift letter for a mortgage, they might encounter increased fraudulent activity. As a result, an official letter clears up any questions and concerns they might have.
It is important to contact your lender and understand the exact information they need in the letter. Some lenders may require additional information to accept the gift.
How much money can you receive as a gift?
There are a few rules that apply to down payment gifts. These boil down largely to the tax implications involved.
Taxes for gift giving and receiving
For starters, a gift recipient does not face any tax consequences. On the other hand, a gift-giver might. There are certain thresholds above which a gift-giver would have to pay taxes based on IRS gift tax rules.
If you are giving a gift, we encourage you to speak to your accountant or tax advisor to understand the impact on your finances. They can answer questions about when to file a gift tax return and the lifetime gift tax exclusion.
Requirements for gifts
There are various requirements based on the property type. Let's look at the differences before you write your gifted deposit letter:
Primary residence
Both the closing costs and the downpayment can be a gift if the home will be a primary residence.
Second home
Your down payment and closing costs can be a gift. But if the down payment will be less than 20% of the purchase price, the buyer needs to add 5% of their own funds.
Investment property
An investment property is different; down payment gifts are not allowed for this type of buy.
Multi-family
A multi-family home allows gifts, but the buyer must pay 5% of the down payment if the gift covers less than 20% of the down payment.
Who can give you a gift?
So you've nailed down how much you can receive from gift funds. However, you still need to confirm another piece of information - who is giving you the gift money for down payment.
You see, many lenders and mortgage programs have different rules on this. Some only allow gifts from a blood relative, or even a godparent, while others allow gifts from friends and non-profit organizations.
It's important to know about all this before deciding to give money and send in a gifted deposit letter.
Gifts for conventional loans
Some recent examples of this include conventional loans through Fannie Mae or Freddie Mac.
For these, family members are the only eligible donors, including siblings, grandparents, and parents, someone who has legal guardianship, your spouse, aunts and uncles, a domestic partner, etc.
It can include family by blood, marriage (such as your in-laws), or adoption. It can also include fiancés.
Money for FHA loans
Another category is FHA loans. Under FHA loans, nieces, nephews, and cousins may not give any money. However, close friends can.
In addition, non-profits, employers, charitable organizations, and labor unions do qualify.
Gift money for VA and USDA loans
The most permissive category is VA and USDA loans. Under these loans, anyone can be a gift donor.
The only restriction is that the person cannot hold any interest in the purchase of your home. An example of this would be your real estate agent, the seller, or your lawyer, should you use one.
Getting a gift of equity? Here's what you should know
Another alternative your donor may provide is a gift of equity. The gift occurs when you purchase a property from a relative for less than the selling price.
The selling price minus the price that you pay is the gift of equity. Gifts in this category can only come from a family member. You can use your gift of equity towards your down payment and closing costs.
Moreover, FHA loans allow the use of gifts of equity, giving you more options to pay down the loan.
On the other hand, jumbo and VA loans do not permit the use of gifts of equity.
Similar to the above, a borrower must submit a gift of equity letter to get the ball rolling. Minimum contribution amounts still apply.
Mortgage down payment gift letter template
Now that we have ironed out the fine details around a gifted deposit letter for a mortgage, it's time to take a look at a down payment gift letter template.
Sample gift letter for a mortgage
Address: [Insert your address]
To: [Insert bank name or lender name and address]
Date:
I/We [insert name(s) of gift-giver(s)] intend to make a gift of $[exact dollar amount of gift] to [name of recipient]. [Name of recipient] is my / our [insert relationship].
This gift will go towards the purchase of the home located at [insert the address of the property under consideration].
[Name of recipient] is not expected to repay this gift either in cash or services. I/we will not file a lien against the property.
The source of the gift is from [insert name of the bank, description of the investment, or other accounts the gift is coming from].
[Insert donor signature(s)]
[Print name]
[Donor address, telephone, and email]
Learn what is required to write a gifted deposit letter!
A gifted deposit letter is a crucial document in the homeownership process and can really help out first-time homebuyers.
By following the simple guidelines above, you'll be well on your way to getting your loan application approved! Best of luck with the process, and be sure to read up on how to avoid being house poor and whether a house is an asset or liability.