Key Takeaways
- Legal document confirming non-repayable gift funds.
- Used to verify down payment or closing cost gifts.
- Excludes gifted funds from debt-to-income ratio calculations.
- Requires donor info and explicit no-repayment statement.
What is Gift Letter?
A gift letter is a legal document confirming that funds given to a borrower for a home purchase are a true gift, not a loan. It typically accompanies mortgage applications to verify that the money will not affect the borrower’s debt-to-income ratio.
This letter protects lenders and borrowers by clarifying that no repayment is expected, ensuring transparent underwriting during the mortgage process.
Key Characteristics
Gift letters have specific elements that lenders require to validate gifted funds:
- Donor Information: Includes name, contact details, and relationship to the borrower, often an immediate family member.
- Gift Amount and Date: Exact dollar amount and date funds were transferred.
- No Repayment Statement: Explicit wording that the gift is not expected to be repaid.
- Property Details: Address of the home being purchased with the gifted funds.
- Signatures: Signed by both donor and borrower to confirm authenticity.
- Lender Documentation: Additional proof like bank statements may be required to trace the origin of funds.
How It Works
When applying for a mortgage, you provide a gift letter to your lender to demonstrate that down payment or closing cost funds are gifted. This helps lenders exclude these funds from your debt-to-income (DTI) calculations, improving your qualification chances.
Lenders review the letter alongside other documents to ensure compliance with loan program rules. For example, some loans require documentation if the gift exceeds a certain percentage of your income or purchase price. The letter must clearly state there is no expectation of repayment to avoid being counted as additional debt.
Examples and Use Cases
Gift letters are common in various homebuying scenarios:
- Family Support: A parent providing a down payment gift for their child’s first home purchase, verified with a formal letter.
- Graduation Gifts: Some programs allow unrelated donors to gift funds for education or home purchase with proper documentation.
- Trust or Estate Gifts: Funds from an A-B trust may require the trustee’s signature and supporting legal documents.
- Multiple Donors: Gifts from both parents or other close relatives can be combined, each with separate gift letters.
Important Considerations
Ensure your gift letter meets lender requirements by confirming the donor’s relationship and the loan program’s specific rules. Keep in mind that gifted funds cannot be loans in disguise, which would negatively impact your credit profile and loan eligibility.
Also, be aware that earnest money deposits differ from gift funds and have separate documentation standards. Always consult your lender early to clarify acceptable sources and documentation to streamline your mortgage approval process.
Final Words
A gift letter verifies that funds provided for your mortgage are genuine gifts, not loans, helping you qualify more easily. Check your lender’s specific requirements and ensure the letter includes all necessary details before submission.
Frequently Asked Questions
A gift letter is a legal document from a donor confirming that funds given to a homebuyer, usually for a down payment or closing costs, are a true gift with no expectation of repayment. It helps lenders verify that the money isn’t a loan, which could affect the borrower’s debt-to-income ratio.
Typically, gift letters come from relatives or close friends. However, specific loan programs like Fannie Mae and Freddie Mac have rules about acceptable donors, and some loans may allow unrelated donors with proper proof, such as a graduation gift with a diploma.
Lenders usually require a gift letter when the gifted amount exceeds certain thresholds, such as more than half the borrower’s monthly household income for conventional loans or over 1% of the home’s purchase price for FHA and USDA loans. No letter is needed for seasoned funds held in the borrower’s account for over 60 days.
A gift letter should include the exact gift amount and date, property address, donor’s name, contact details, relationship to the borrower, and a clear statement that no repayment is expected. Both donor and borrower generally must sign the letter.
Gift funds can typically be used for down payments, closing costs, and reserves. However, some loan programs require the borrower to contribute a portion of their own funds and may limit how much of the down payment can come from gifts.
Lenders may ask for additional documentation such as the donor’s bank statements or withdrawal slips, and sometimes they contact the donor directly to confirm the source and nature of the gifted funds to prevent fraud.
Without a gift letter, lenders may treat the funds as a loan, which increases the borrower’s debt-to-income ratio and could affect loan approval. Providing a proper gift letter ensures the funds are excluded from debt calculations.
