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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Gift Letter
When you are buying a home, you are likely required to have some reserve amount for the down payment and the rest would be covered by mortgage financing.
Usually, borrowers accumulate these funds and pay the down payment to the seller at the time of closing.
However, what if you don’t have enough funds to cover the down payment? Well, there is an option in which the borrower can receive a gift of funds from family, friends, or spouse. In this post, we will understand what a mortgage gift letter in detail is.
What Is A Gift Letter In A Mortgage?
A mortgage gift letter is a letter that is signed by the donor who provided gift funds to the receiver, certifying that the funds are not provided as a loan and that the donor is not expecting any repayment for the same.
These gifts are used by the buyer to cover the cost of the mortgage and the down payment to purchase a property.
The lender would require this letter to make sure that there is no additional debt taken by the borrower to cover the down payment or closing costs, as it may change the approval parameter for the borrower.
A gift letter signed by the donor proves that the borrower has not taken any additional debt or loan from the donor and does not have to repay that to the donor.
For example, let’s assume you want to buy a home and your parents provided $10,000 as a gift.
You can use this money for your down payment and closing costs. However, to do so you must convince your mortgage lender that it is not a debt that you have to repay.
To prove that, your parents need to provide a signed letter to the lender mentioning that it is a gift and not a debt.
The gift letter proves your relationship with the donor, the exact amount gifted along with the source of funds, and states that you are not responsible to pay it back.
What Is Included In A Gift Letter?
In most cases, the lender will provide a template for the mortgage gift letter. If your lender does not provide you with this letter, you can request the details that are required in the letter. Below is an example of what a mortgage gift letter might include.
[Donor’s Name]
[Donor’s Address]
[Donor’s Phone Number]
[Donor’s Relationship With The Recipient]
[Recipient’s Name]
[Recipient’s New Property Address]
[Gift amount and date it was provided or to be provided]
[Whether or not the recipient is planning to use these funds as earnest money deposit]
[Signature and date of both recipient and donor]
By signing this letter, you confirm that neither the donor nor the recipient has received a gift from any person, company, or entity related to the property or transaction being sold.
This includes sellers, brokers, contractors, mortgage lenders, or any related entity. Both recipient and donor agree that the gift must not be returned.
Who Can Provide Gift Of Funds In Mortgage?
In a conventional loan, the gift of funds can be given by family members. According to Fannie Mae and Freddie Mac, family members may include:
- Grandparent (including great, step, and foster)
- Niece or nephew (including step)
- Child (including step, foster, and adopted)
- Sibling (including step, foster, and adopted)
- Parent (including step and foster)
- Fiancé or fiancée
- In-laws (including parents, grandparents, aunt/uncle, brother- and sister-in-law)
- Aunt or uncle (including great and step)
- Cousin (including step and adopted)
- Spouse
- Domestic partner
- Godparents (Only For Fannie Mae)
- Relatives of domestic partner (Only For Fannie Mae)
- Former relatives (Only For Fannie Mae)
In the case of Fannie Mae, the borrower can also receive the gift of funds from his or her future in-laws.
In FHA loans the gifts could be received from all the above-mentioned individuals in addition to the charitable organization, labor unions, and employers.
USDA and VA loans do not have any restrictions on who can give funds as a gift apart from parties involved in the real estates transaction such as the seller, the developer, or the builder.
Conclusion
Receiving a gift to cover your mortgage closing costs and down payment from your family or friends may sound very exhilarating.
However, without the gift letter lender might not go beyond the underwriting process.
That is why this letter is very important if you are using gifts of funds to pay for the down payment and closing cost for your property purchase.
