What Is a Mortgage Gift Letter?

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What Is a Mortgage Gift Letter?

Whenever someone chooses to contribute to a down payment of another person, the borrower must provide documents that clearly indicate who transferred the money, how much, and what bank accounts have been involved in the transaction. A mortgage gift letter is a letter that provides all necessary information about the money being given to the borrower without the expectation of paying it back. Usually, this letter comes from relatives or friends, but it can be written by anyone including colleagues, employers, and other people. This letter proves that the funds transferred are a gift and not a loan.

Mortgage gift letters need to have specific information to be valid for the lenders, so it is very important to cover all necessary points in a formal manner when writing one. The letter must include the following information:

• The exact amount of the gift.
• The signed statement by the donor that no repayment is required.
• The address of the property the borrower is purchasing.
• The information about the donor’s account including bank name, account number, and account type.
• The date when the transfer takes place.
• The statement about the relationship between the donor and the beneficiary.
• The donor’s contact information including their name, address, and phone number.
• The dated signatures of the donor and the beneficiary.

How Much Money Can You Receive as a Gift?

Depending on the type of loan a borrower is applying to, there may be certain limits in place as to how much money a donor can gift to the borrower. Additionally, the number of donors a borrower may have also depends on the type of loan the borrower applies to.

Conventional Loan

Typically, conventional loan lenders allow the borrower to use gift letters to justify the funds for the down payment. There are no hard restrictions on the dollar amount a borrower can receive as a gift, but the requirements may slightly differ from a lender to a lender. On the other hand, it is important for the borrower of a conventional loan to clearly indicate the relationship between the donor and the beneficiary. Most of the time, the gift letters may be approved only when the donor and the beneficiary are family members. Anyone with a special relationship to the beneficiary other than a family member must provide proof of the relationship.

FHA Loan

FHA loans are government-backed loans that are insured by the Federal Housing Administration. The minimum down payment allowed for FHA loans is 3.5%, and the borrower is allowed to pay the whole down payment using the gifts. This means that the gift limit for the FHA loan is 3.5% of the house price. It is important to note that this limit provides information about how much funds can be disclosed as a gift. If a borrower receives more than 3.5%, then they only have to disclose the 3.5%.

VA Loan

VA loans are backed by the Department of Veteran Affairs. These loans usually have low interest rates and better terms than regular loans, but they are issued only to eligible veterans and servicemen. VA loans do not require a down payment. This means that the borrower does not have to pay any money upfront, so they do not necessarily require a mortgage gift letter. On the other hand, the Department of Veteran Affairs allows borrowers to put down as much as they want and use the mortgage gift letter to cover the whole downpayment.

USDA Loans

USDA loans are another popular type of loan that is backed by the US government. This type of loan in particular is backed by the US Department of Agriculture, and they are issued to borrowers who are planning to purchase a property in a rural area of the USA. Just as VA loans, USDA loans require no down payment. Even though USDA loans do not require a down payment, mortgage gift letters are still permitted as long as they meet the requirements for a conventional gift letter loan.

Fannie Mae HomeReady®

Fannie Mae HomeReady® mortgage loan is issued to low to moderate income households. The minimum down payment requirement for a HomeReady® loan is 3%, and the whole amount can be covered using gift contributions if the property bought is single-family and used as a primary residence. If the property is multi-family, then the borrower may have to put down at least 3% of their own funds. This means that Fannie Mae does not have the limit for the amount of money a borrower may receive as a gift for single-family primary residence property.

On the other hand, there are other requirements that may limit the amount of money that can be pledged as a gift. For example, this type of loan has a certain loan limit, which means that the maximum amount a loan can be issued for is the limit. As of 2022, the conforming loan limit for most areas is around $647,200. Supposing that the borrower wants to cover the down payment of 3%, the maximum amount they can receive as a gift through a mortgage gift letter is $19,416. Any gifts that surpass this amount can be received, but they do not have to be disclosed in the letter because they do not affect the loan payment schedule.

Freddie Mac Home Possible®

Home Possible® loan by Freddie Mac is very similar to Fannie Mae HomeReady® loan. Both of them are conforming loans, and they both have the same loan limit. Freddie Mac also allows the down payment to be as low as 3%. Freddie Mac allows the whole down payment to be gifted by a relative if the property is single-family and used as a primary residence. When it comes to multi-family properties, unlike Fannie Mae, Freddie Mac allows the borrower to not contribute their own money for the down payment if the borrower receives a gift of at least 20% of the loan value.

Mortgage Gift Letter Rules

A mortgage gift letter is an official statement that must be backed by a set of documents to be valid. There are multiple criteria a mortgage gift letter should meet to be valid in the eyes of lenders.

Documentation About Transactions

Any transactions that are mentioned in the letter must be backed by documentation about the transaction. The documentation should show the traces of the money moving from the account of the donor to the account of the beneficiary. If the money has not changed hands yet, the borrower can provide the donor’s bank statement with sufficient funds on their account. The borrower usually has to provide the following documents:

• A check, a deposit slip, or a receipt related to the transaction. Depending on the way the money has been moved, applicable documentation that proves the legibility of the transaction must be provided.
• A bank statement or a receipt indicating that the money left the account of a donor.
• The settlement statement clearly indicates that the money has been deposited into an escrow account related to the house purchase.

Original Source of Funds

In addition to the trail of money moving from the donor’s account to the beneficiary’s account, a borrower also must provide documentation about the source of money. This means that the donor has to provide information about where the money has originated. Any type of income source such as a salary, rental property income, or capital gains income will suffice to prove the origination of the funds. On the other hand, if the money originated using a loan, then the lender may not accept this type of source because it implies repayment, which is not allowed through a mortgage gift letter.

Statement About Relationship Between the Parties

Another important piece of documentation that must be provided is the relationship between the donor and the borrower. There are certain relationships that are prohibited in this type of transaction. The lenders try to make sure that there is no material motive between a donor and a beneficiary for the transaction. For example, a donor cannot be the borrower’s real estate agent, a seller, or a developer of the property the borrower is planning to purchase. A gift letter from any one of these individuals will not be valid because there is a material motive for them to help the borrower close the deal.

On the other hand, relationships that do not have a material interest are usually allowed for mortgage gift letters. These relationships usually include family, friends, employers, or government agencies. Depending on the type of relationship, the borrower may have to provide additional documentation that supports their relationship. Family members, including blood relatives, spouses, and adopted family members, usually do not require any additional proof of relationship between the donor and the beneficiary. On the other hand, relationships such as friendship must be proven through additional documentation. If an employer or a government agency contributes money through a mortgage gift letter, a clear reason why this transaction takes place must be indicated.

Absence of Repayment Terms

A gift letter implies that the beneficiary receives the money without any expectation of repayment. It is important to make sure that there are no repayment terms related to the money mentioned in the gift letter. If the beneficiary is required to repay the funds mentioned in the gift letter, then the lender will not approve the letter.

Some people may consider not disclosing the repayment terms in the gift letter to avoid rejection. The beneficiary and the donor should ensure that this does not happen. If it does happen, it is considered mortgage fraud that may lead to jail time for both parties. This is a severe offense that may lead to a lot of problems down the road. If the money is not a gift, the beneficiary must not disclose it as a gift to avoid legal prosecution.

Mortgage Gift Letter Template

Mortgage gift letters must include a lot of information to be valid for mortgage origination purposes. The following letter can be used as a universal template that covers all the information a lender needs to see in a mortgage gift letter.

Date: [Date]

To: [Bank/Lender Name]

I [Donor’s Name] intend to make / have made a gift of [Gift Amount] to [Recipient Name] that should be applied towards the purchase of a house located at [House Address].

This gift does not imply any obligation of repayment either in the form of cash or services provided by the recipient.

Relationship to the Borrower: [Relationship Status]

Donor’s Name: [Donor’s Name]

Donor’s Address: [Donor’s Full Address]

Donor’s Contact Information: [Donor’s Phone Number And/Or Email]

Source of Funds:

Bank Name: [Donor’s Bank Name]

Account Type: [Donor’s Account Type]

Account Number: [Donor’s Account Number]

[Donor’s Bank Statement Attachment]

[Paystubs Attachment]

Information About the Transfer of Funds:

Bank Name: [Borrower's Bank Name]

Account Type: [Borrower's Account Type]

Account Number: [Borrower's Account Number]

Transaction Date: [Transaction Date]

[Borrower's Bank Statement Attachment / Proof of Transfer]

Donor’s Signature: ______________. Date: ______________.

Recipient’s Signature: ______________. Date: ______________.

Mortgage Gift Letter Example

Gift letters may vary in their content depending on the circumstances such as relationship status between the parties and a type of transfer. The following example provides an insight into how a gift letter may look between a father and a son when the father is the donor and the son is the beneficiary.

Date: March 1st, 2022.

To: XYZ Bank.

I Joe Schmoe, have made a gift of $75,000 to Joe Schmoe Jr. that should be applied towards the purchase of a house located at 123 Street Ave, Townston, AB 12098.

This gift does not imply any obligation of repayment either in the form of cash or services provided by the recipient.

Relationship to the Borrower: Family

Donor’s Name: Joe Schmoe

Donor’s Address: 321 Avenue St, Townston, AB 90321.

Donor’s Contact Information: (321) - 456 - 0987

Source of Funds:

Bank Name: XYZ Bank

Account Type: Checking

Account Number: 12345

[Donor's Bank Statement Attachment]

[Paystubs Attachment]

Information About the Transfer of Funds:

Bank Name: XYZ Bank

Account Type: Checking

Account Number: 09876

Transaction Date: February 20, 2022

[Borrower's Bank Statement Attachment / Proof of Transfer]

Donor’s Signature: Joe Schmoe. Date: March 1st, 2022.

Recipient’s Signature: Joe Schmoe Junior. Date: March 1st, 2022.

Tax Implications of Mortgage Gift Letters

Generally, the IRS has a tax on gifts that must be paid by the donor. As of 2022, the first $15,000 given as a gift is not taxed and does not need to be filed with the IRS. Anything beyond $15,000 must be filed with the IRS. Even though the gifts surpassing $15,000 must be filed with the IRS, it is unlikely that the donor will have to pay taxes on it. Any amount that is larger than $15,000 will be deducted from the lifetime allowance for gifts. The current lifetime gift tax exemption is $12,060,000, which means that the donor has to gift $12,060,000 before paying taxes on the gifts. When the donor surpasses the exemption limit, the donor may have to pay up to 40% of their gift amount in taxes.