This post covers mortgage gift letter.
Did you know that 32% of first-time home buyers in the U.S. received a gift from a relative or friend to put toward their down payment? (source)
Everyone likes gifts
I love Gifts
You love gifts
But when it comes to mortgage gifts, things are simply complex.
The donor has to certify to the lender that funds provided to you for a down payment are considered a gift rather than a loan that must be repaid.
Why does the lender care about that?
Well, In this post I’ll answer that question and go over the rules for writing a mortgage gift letter in order to assist you to avoid errors that can delay the approval of your loan.
Here you will learn
- what is a mortgage gift letter?
- Why is it necessary
- How do you write an effective mortgage gift letter?
- Mortgage gift letter template
- Does the mortgage gift letter need to be notarized?
Let’s get start
Jump to section
What is a mortgage gift letter?
A mortgage gift letter is a brief statement of facts written by a donor to certify /confirm to the potential lender that money given to a potential borrower for a down payment is merely a gift and not a loan that must be repaid.
Among other things, this letter must show who is making the donation, how much is being given, and the connection between the giver and the beneficiary.
Why do lenders care about mortgage gift letter?
In fact, not only the lenders but also donors, IRS, and other federal agency cares about it.
Here is why
- To prove that the individual who is giving you the money is not a party to the home purchase
- The mortgage lender needs to be aware that the funds come from someone with a connection to the homebuyer.
- To formally state that the funds you’re getting are a gift rather than a loan. Loans make it more difficult for you to repay your mortgage and increase the risk to the lender.
- To report the gift amount to the IRS for tax purposes
- It contributes to meeting the requirement that a borrower’s down payment funds come from legal sources. The government has rigorous rules to combat money laundering and other economic crime.
- A gift letter proves in writing not only that the giver gave the gift, but also that he or she had the financial ability to do so by giving bank statements as proof. This is especially crucial when it comes to FHA loans.
A gift letter isn’t always enough to establish that the money in your account is authentic.
In order to verify the transaction, your lender may get in touch with your donor and request withdrawal and deposit slips.
These documents demonstrate to the lender that your relative did not take out a loan to pay for your down payment and that they had the money in their account before giving it to you.
You have to do your ‘homework’ to ensure that your gift letter meets your lender’s requirements. (For more information, you may read these Mortgage gift letter rules by loan type and property type from bankrate.com)
In the coming section, I’ll also show you how to draft an effective mortgage gift letter so you can assist your donor to handle the process easily.
How to write an effective mortgage gift letter
A mortgage gift letter is written in a business letter format. Start your letter with your address and contact information, followed by a date and the potential lender’s address, and state that you have made a gift (provide the amount) to the potential Borrower, and no repayment of this gift is expected. Do not forget to provide your relationship with the borrower.
Finish your letter with SINCERELY followed by your signature, and name.
REMEMBER the aim of your mortgage gift letter is to prove that the funds you’re giving are a gift rather than a loan.
Therefore to write an effective mortgage gift letter do the following
- Provide your name, address, and contact information
- Include the date of the letter
- Include the potential lender‘s name and address
- Provide the name of the borrower
- Indicate your relationship with a borrower- a spouse, child, friend, or relative
- Instantly tell the lender that the fund you have given to the borrower is not a loan but a gift (in your opening paragraph)
- Provide the exact gift amount
- Provide the source of funds for this gift
- Describe that gift is to be applied toward the purchase of the property (provide the location)
- Be straightforward
- Maintain a professional tone
- Be honest
- Signatures of the donor and borrower
- Attach necessary documentation
- The donation check and deposit slip indicate that money has been deposited into your account.
- The withdrawal slip or bank statement demonstrating that monies have left the donor’s account.
- The check payable to the closing agent. (Add the transaction escrow number to the check to ensure that money is delivered to the escrow account associated with your purchase.) This information is available from the closing agent.)
- The settlement statement proves the money that has been deposited or wired into the escrow account.
Mortgage gift letter template
City, State, Zip Code
[Potential lender’s Organization ]
[Potential lender’s Street Address]
[Potential lender’s City, State, and Zip Code]
Dear [Mr/Ms. Recipient’s last name]
It is with great enthusiasm that I’m writing this letter to certify that I have made a bona fide gift of [$#] to[name of the potential borrower] who is my [relationship with potential borrower] and there is no obligation, expressed or implied, to repay this sum in cash or other services of any kind now or in the future.
The gift is intended to be used to purchase the property at [location]
The money for this gift came from:
Type of account:
I further certify that the funds provided to the applicant were not made accessible to the donor by any person or entity with an interest in the property’s sale, including the seller, real estate agent, builder, loan officer, or any entity linked with them.
I thoroughly understand that making any false statements when applying for this mortgage is a Federal offense punishable by fine or imprisonment, or both, as defined in Title 18, United States Code, Sections 1014 and 1010.
Enclosed with this letter
- My bank statement evidencing funds came from my account
- A bank statement from [borrowers name] to prove that funds were deposited into his/her account
Donor Signature……………………………….. Date……………………………………………
Recipient Signature……………………………….. Date……………………………………………
Mortgage gift letter pdf
Does the mortgage gift letter need to be notarized?
No, a mortgage gift letter doesn’t need notarization, Once signed by the donor and recipient (potential borrower), the gift letter becomes a legally binding document.
Does a mortgage gift letter get reported to the IRS
It depends on the amount of the gift.
According to the IRS annual gift tax exclusions for 2022 and 2023, any down payment gift of less than $16,000 and $17,000 consecutively does not need to be reported. The funds over that amount must be declared on the donor’s gift tax return.
Apart from that exception (and many others) as a general rule, any gift is a taxable gift, thus it has to be reported to IRS.
It is important to note that the annual exclusion applies to all gifts made to each donee. In other words, if you contribute $17,000 to each of your children in 2023, the yearly exclusion will apply to each gift.
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