How to Use Gift Letters For Your Mortgage and Down Payment

What to Know About Gift Letters to Obtain a Mortgage

Are you wondering about the rules surrounding down payment gifts when getting a mortgage to purchase a house?

Understanding how to use a gift letter for your mortgage is essential.

Finding the money to make a down payment on a house can be demanding, so help from a relative can speed up your progress towards buying a home.

Many potential home buyers’ income reasonably supports becoming a homeowner, but the down payment funds can sometimes be a sticking point.

For most renters scraping enough of a down payment together is the most significant obstacle to buying a home.

While relatives might offer to gift you money to help you on your way towards saving a down payment, it may not be as simple as you expect.

Following Gift Letter For Mortgage Rules

Down payment gift funds do fall under some rules and aren’t without any problems. Some folks incorrectly assume you can use down payment gifts from relatives in whatever fashion you choose. Unfortunately, that is not the case.

Let’s look at the issues involved when receiving down payment monies to give you the resources to make sound decisions.

The rules are not complicated when giving and receiving down payment gifts, but they are worth knowing.

Working as a real estate agent for the past thirty-five years, I can tell you it makes sense to square away your down payment gift letter to get a mortgage.

You might even consider doing so before writing an offer for a house.

Who Can Give a Down Payment Gift?

When most people think about who can give a down payment gift, they automatically think of a family member.

However, eligible gift sources for a mortgage down payment can come from other entities as well.

Here are some other sources of potential down payment gift funds.

Mortgage Underwriters Verify Mortgage Gift Letter Funds

When you apply for a loan, your lender will look at your financial situation to work out their risk. Verifying financial information is known as underwriting and involves checking your income ratio, bank statements, tax returns, credit score, earnings, and any assets.

The underwriters for your lender will look at the money in your bank accounts to ensure you have enough to pay the down payment. If there are large irregular deposits, they will want to know where they came from.

There will typically only be issues with more considerable down payment gift funds. If you have been given money, which is more than half of your monthly income, or a gift that is more than one percent of the home’s value, there could be further checks required.

The source of the funds will need to be verified. Large deposits can be red flags, especially when it involves home loans.

If you have down payment gift money, your mortgage underwriter may need more information about where these funds came from. The mortgage banker needs to ensure that this isn’t a loan you are expected to repay. It’s all part of the underwriting process.

To ensure that this new money isn’t a loan, they will need a letter from the gift provider. One of the better first-time buyer tips will be to get your financial house in order before this point.

What is a Gift Letter For a Mortgage

If you are fortunate enough to have a family member who can give you money towards your down payment, they may need to write a letter. The underwriter may require this to explain where the down payment gift money originated from.

The letter should include details about the lender, such as; name, address, contact phone number, relationship to the borrower, and address of the home to be purchased.

Also required in the letter should be the date and amount of funds given to the borrower. They should write a sentence explaining that it is a gift and that there isn’t an expectation of repayment. The gift-giver and the borrower should sign the mortgage gift letter.

The executed mortgage gift letter might be enough to satisfy the underwriter, or they might need additional documentation. Deposit slips or other statements might be necessary to confirm the information given in the gifting letter.

Your lender might have a template letter for this purpose. If this is the case, you will need to provide it to the person who has gifted you the cash.

If the lender doesn’t have a template, ask them to let you know their requirements so that you don’t waste the time of the person who has been generous with their money.

What Should Be Included in a Down Payment Gift Letter

Here is a summary of what a down payment gift letter should include:

• The address for the property the borrower is purchasing
• The name, address, and phone number of the person giving the gift – (gift donor)
• How much is being gifted to the buyer
• The relationship of the person giving the gift to the borrower
• The date that the gift was transferred
• A statement saying that the down payment gift will not be required to be paid back
• The donor’s signature

It is essential to know that the mortgage gift letter itself may not be all of the proof a lender needs that these funds are, in fact, a legitimate gift.

The lender may also ask for copies of withdrawal and deposit slips as part of their verification process.

Mortgage Gift Letter Template

If your mortgage company doesn’t have a standard letter for mortgage gifts, you can use the sample gift letter provided here. It should have all the required information your mortgage lender will need.

Who Can Gift Down Payment Money Based on Mortgage Type?

Your loan type can impact who is eligible to give you mortgage gift funds. Your loan officer should explain the rules of each mortgage type so you can make an informed decision.

There are some rules about who can give you down payment gift money. This changes slightly depending on the type of loan you are applying for. Here is a summary of all the major mortgage programs and their requirements to provide gift monies.

There are many excellent first-time home buyer mortgage programs worth exploring. If you are sure a down payment gift will be part of your requirement, check with the lender before submitting your loan application.

A common first-time buyer mistake is not preparing yourself financially. Don’t be that person.

Traditional Mortgages

The most common form of financing is conventional loans. A conventional home loan program includes those sponsored by Fannie and Freddie.

If you get a loan through Fannie Mae or Freddie Mac, gifts can only be from your family members. Acceptable donors will include your close family members, cousins, aunts, uncles, nieces, and nephews.

Also included are stepfamily members, your in-laws, and foster or adopted relatives. These rules also cover your domestic partner or fiance. You can not get a monetary gift for a mortgage from close friends.

The mortgage company will verify the donor’s relationship. There is also a minimum borrower contribution of 5 percent with Fannie Mae and 3 percent with Freddie Mac.

FHA Loans

FHA mortgages are backed by the Federal Housing Administration, a government agency.

An FHA loan has a similar rule but doesn’t allow gifts from nieces, nephews, or cousins. However, they allow gifts from friends who are interested in your life, and they also permit contributions from your employer, a labor union, government agencies, and charities.

USDA and VA Loan

When it comes to the VA mortgages and USDA loans, they have fewer restrictions.

However, they don’t allow gifted funds from anyone who would benefit from the proceeds of the purchase. This means that you can’t use a gift from a developer, builder, seller, or even a real estate agent.

They are not allowed because they would be considered an interested party in the sale. These parties do not want to permit mortgage gift money for those with a vested interest.

Are There Limits on Down Payment Gifts?

Generally, there aren’t limits on the amount of money someone can gift you for down payments of closing costs, though there can be tax implications.

However, some types of loans may need you to contribute a certain amount of the down payment. The regulations regarding this can change frequently, so check with your lender for the latest details.

For example, FHA mortgages have a 3.5 percent down payment requirement with credit scores greater or equal to 580.

When credit scores are below 580, FHA requires ten percent down. In both circumstances, an eligible donor can provide the entire down payment. A borrower does not need any of their own funds.

Make Your Mortgage Gift Money Seasoned

If possible, it is wise to try and make your gift money what lenders refer to as “seasoned.” The term seasoned means it has been sitting in your bank account for some time. Most lenders recognize two months as being a seasoned amount of time. When money is seasoned, you often don’t have to worry about writing gift letter documentation.

So if you know your parents are going to help you buy a home by providing a down payment gift, it would make sense for them to give you the money months in advance of your purchase.

Some people like to use a wedding gift as a source of money. Doing so is perfectly fine as long as the money has been sitting in a bank account for a few months.

Other Restrictions With Gift Funds and Your Mortgage

Home loans with gift funds have requirements depending on the property type.

Gift funds can’t be used if you are buying an investment property. There are some restrictions on a second home, with gifts not allowed with loans from the USDA, the VA, or the FHA. Whereas a traditional loan does allow gifting when purchasing a second home.

When you buy a primary residence, there are fewer restrictions on gifts. You can use donations to cover all of your down payment for a single-family home.

If you purchase a multi-family home and the down payment is 20 percent or more, you don’t need to contribute. If it is less than 20 percent, you will need to provide 5 percent or more of your own money. These rules will typically be the case with second homes as well.

 Tax Implications For Down Payment Gift Money

There shouldn’t be any tax problems for the borrower, but there could be for the person who gifted the money. Married couples can jointly give up to $32,000 for any purpose. This is reduced to $16,000 for single-family members without gift tax becoming payable. Any sums above these figures will be liable for taxation in any single year.

In that case, you will fill out a gift tax return.

You should make sure the gifter understands the tax implications of gift funds if you want to avoid family problems. It is also important to note there is a lifetime gift tax exclusion over your lifetime that excludes you from having to pay a Federal Gift Tax. The lifetime gift tax exception is currently 11.7 million dollars.

What to do and Not Do With Down Payment Gift Funds For a Mortgage

What you should do with gift monies:

1. Get a signed gift letter from the donor.
2. Make sure there is documentation of the gift money.
3. Get the down payment gift in advance, so the money is seasoned.
4. Understand how gift monies work for tax purposes

What you should not do with gift monies:

1. Lie to the lender about a loan being a gift
2. Add or change funding amounts without an explanation.
3. Not check with the lender on gift money restrictions.

Alternative Ways to Raise the Down Payment

If you aren’t lucky enough to have some of the down payment gifted to you, there are other things you can do to find the money.

Some down payment gift assistance programs could help. If you meet the requirements, you might be able to get up to 7 percent of your down payment funded through such a program. State housing associations or private organizations can offer these programs in your area.

Increasing your down payment funds could be as simple as selling some of your possessions or getting extra work. You could even start a side hustle business to increase your income and save for a home faster.

What is a Gift of Equity?

A gift of equity is different than a monetary gift. With a gift of equity, a seller will assist a family member by selling their home for less than the fair market value determined by a comparative market analysis or a real estate appraisal.

The lower sales price provides the buyer with instant equity in the property.

Other Valuable Mortgage and Financial Resources

Use these additional resources to make sound decisions before, during, and after purchasing a home.

• What does Credit Karma do – one of the excellent tools available for anyone interested in improving their credit standing is Credit Karma. They provide assistance for anyone looking to make smart credit decisions. See all the services they offer in the article.
• How to get your free credit report – if you will be purchasing a home, one of the more intelligent things you can do is get a hold of your credit report. Doing so is very easy and free! See what you need to know about acquiring your credit report from the three credit reporting agencies.
• Frequently asked mortgage questions – if you are like most buyers, you like to have answers to popular mortgage questions, especially if you have not purchased a home for an extended period of time. See the questions and answers to many of the most asked mortgage questions.

Final Thoughts on Down Payment Gift Letters

Using down payment gift money can be a great tool in becoming a homeowner. However, first-time home buyers need to be familiar with the enormous financial responsibility of becoming a property owner.

It is not just about down payment funds but the ongoing ability to keep up with mortgage payments and all of the associated costs of homeownership.

Hopefully, you have found this guide to down payment gifts to get a mortgage helpful. Gift funds are a topic anyone expecting a contribution should understand.

About the author: The above Real Estate information about a gift letter for a mortgage was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for 35+ years.

Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!

I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.

Summary

Article Name

Gift Letter For a Mortgage: What to know and How to Use One

Description

See what you need to know about down payment gifts when buying a home. Learn how much can be gifted, how to document, tax implications, and more.

Author

Bill Gassett

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Maximum Real Estate Exposure

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