The lender needs to know the money that came into your account is a gift, not a loan. Loans hinder your ability to pay back your mortgage and add an additional layer of risk for the lender. In addition, the government has strict rules in place to prevent money laundering and other financial crimes.
Prove The Source Of Your Down Payment
Can’t prove the money you’re using for your down payment is a gift and not a loan? Your lender might deny you a mortgage.
The solution is to ask for a gift letter to accompany any large financial gift you use for your down payment. A gift letter is a statement that ensures your lender the money that came into your account is a gift and not a loan. The person who gave you the money must write and sign the gift letter as well as provide their personal information.
Know The Limits On Gift Money
How much money do you need to receive before a gift letter is necessary? Do you only need a gift letter for deposits that are more than $10,000? What about the relative who gave you a card with $50 – do they need to provide a gift letter?
As a general rule, lenders will want you to explain any gift you receive that’s over half the value of your total household monthly income. For example, if you earn $4,000 a month from your salary, your lender will want you to explain any gifts you receive that are more than $2,000.
This standard guideline applies to conventional loans, VA loans and jumbo loans. For a USDA loan or FHA loan, your lender will want an explanation for any deposit that’s larger than 1% of the adjusted purchase price or appraised value of your home, whichever is larger.
Be Ready For Lenders To Investigate
A gift letter isn’t always the only evidence needed to prove that the money in your account is legitimate. Your lender might contact your donor and ask them to provide withdrawal and deposit slips to verify the transaction. These slips tell the lender your relative had the money in their account before they gave it to you and that they haven’t taken out a loan to fund your down payment.
You can take a few steps ahead of time to make sure your gift letter passes your lender’s standards. We’ll also show you how to write a gift letter so you can help your donor prepare for underwriting.
FAQs
Gift letters are required by mortgage lenders as documentation to prove that the funds received are a gift, not a loan, and that the donor is not involved in the home purchase. The gift letter is an official document that verifies the nature of the received money as a gift, with no expectation of repayment.
How do I write a letter to give a mortgage as a gift? ›
A mortgage gift letter must include the donor's name and information, the gift amount, and other details about the home and gift. It's written and signed by the donor, but your mortgage lender may have a template available to use. A mortgage gift letter must include: Donor's name and contact information.
Does a mortgage gift letter get reported to the IRS? ›
Whether or not mortgage gift money gets reported to the IRS will depend on how much you receive. As of 2022, the annual gift tax applies to amounts over $16,000, meaning that any gift lower than that will not incur the federal gift tax and does not need to be reported to the IRS.
What is an example of a gift letter for a mortgage downpayment? ›
Example of a Gift Letter
I am writing this letter to confirm that I am providing a gift to [Homebuyer's Full Name] to be used as a down payment for the purchase of the property located at [Property Address]. I understand that this gift is to be used solely to secure a mortgage loan for the aforementioned property.
What are the risks of signing a gift letter for a house? ›
Intention is important — Both parties need to sign a gift letter with the full intention that the money will never need to be repaid. Accepting a large financial gift and signing a gift letter while intending to use the money as a loan is a form of mortgage fraud.
How do you write a proof of gift letter? ›
How Do I Write a Gift Letter?
- The donor's name, address and phone number.
- The donor's relationship to the client.
- The dollar amount of the gift.
- The date when the funds were transferred.
- A statement from the donor that no repayment is expected.
- The donor's signature.
- The address of the property being purchased, if known.
First, the donor, or giving party, must perform some act constituting the actual or symbolic delivery of the subject matter of the gift. Second, the donor must possess an unequivocal intent to give. Third, the donee, or receiving party, must accept the gift.
Is a mortgage gift letter legally binding? ›
Yes, a gift letter is a legally binding document in the context of mortgage transactions. It serves as evidence that funds provided for a down payment or closing costs are indeed a gift and not a loan.
Can a mortgage gift letter be electronically signed? ›
Namma lets you electronically generate a gift letter with custom terms that you fill out, e-signed by donor and recipient, that can later on be downloaded as a pdf. This way, a monetary gift towards your home purchase can be documented for providing to your mortgage lender.
How does the IRS know if I give a gift? ›
The primary way the IRS becomes aware of gifts is when you report them on form 709. You are required to report gifts to an individual over $17,000 on this form. This is how the IRS will generally become aware of a gift.
A mortgage gift letter that shows a gift of less than $17,000 might not be reported to the IRS. That's because any gift below the $17,000 limit will not incur the gift tax. However, gift letters that involve a gift of more than $17,000 will likely be reported to the IRS.
How much money can I receive as a gift without reporting to IRS? ›
Generally, the answer to “do I have to pay taxes on a gift?” is this: the person receiving a gift typically does not have to pay gift tax. The giver, however, will generally file a gift tax return when the gift exceeds the annual gift tax exclusion amount, which is $17,000 per recipient for 2023.
How does a gift affect mortgage? ›
A conventional loan is a mortgage that isn't insured or guaranteed with any government entity. Most conventional mortgage loans allow homebuyers to use gift money for their down payment and closing costs as long as it's a gift from an acceptable source, such as from family members.
Is a mortgage gift taxable? ›
What if the down payment gift is above $15,000? Down payment amounts above $15,000 and received as a gift must be reported on a gift tax return by the person making the gift—not the beneficiary. But that doesn't mean the donor will pay taxes.
How do I avoid gift tax? ›
6 Tips to Avoid Paying Tax on Gifts
- Respect the annual gift tax limit. ...
- Take advantage of the lifetime gift tax exclusion. ...
- Spread a gift out between years. ...
- Leverage marriage in giving gifts. ...
- Provide a gift directly for medical expenses. ...
- Provide a gift directly for education expenses. ...
- Consider gifting appreciated assets.
Recommended for you
A gift letter is an important, formal, legal piece of documentation that can help explain that a (usually rather large) sum of money was gifted to you.
How do you prove money is a loan and not a gift? ›
Traditionally courts consider the following factors in determining whether an advance is a gift or a loan: (1) whether there was a promissory note or other evidence of indebtedness, (2) whether interest was charged, (3) whether there was security or collateral, (4) whether there was a fixed maturity date, (5) whether a ...
Why do lenders need bank statements from gift funds? ›
Gifted Funds
Using gift money for a down payment isn't as cut-and-dried as it seems. The source of the money in your bank account matters just as much as the money that's actually in that account. The bank needs to be able to see exactly where the down payment came from before you can use it to close on a home.
