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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.
It is a document that explains when someone gives you money to help you buy a home.
It’s like a note that says, “Hey, this money is a gift, not a loan. You don’t have to pay it back.”
Lenders want this letter to make sure the money you’re getting won’t cause problems when you’re getting a mortgage (a loan to buy a house).
It shows that the money is truly a gift and won’t affect your ability to pay back the mortgage loan.
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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?
Everyone likes gifts
I love Gifts
You love gifts
But when it comes to mortgage gifts, things are simply complex.
Why?
Simply because 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
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Nice question!
In fact, not only the lenders but also donors, IRS, and other federal agency cares about it.
Here is why
REMEMBER!
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 a 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.
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
Your Name
Address
City, State, Zip Code
phone
email
DATE
[Recipeint Name]
[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:
Bank name:
Type of account:
Account No:
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
Donor Signature……………………………….. Date……………………………………………
Recipient Signature……………………………….. Date……………………………………………
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.
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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