Are you lucky enough to be receiving gift funds to help with your mortgage? Find out what a mortgage gift letter is and why you need one to secure a loan.
Let’s say a young couple feels ready to leave their apartment and take a chance on a ranch-style house in their area — but their bank account isn’t ready.
If you don't have the down payment money, loved
What's a mortgage gift letter?
A mortgage gift letter is a form from your donor declaring that
It shows a mortgage lender that you're under no obligation to return the money.
The lender wants to know that when you agree to make your monthly home loan payments, you won’t face the additional financial stress of having to pay back the donor. That could make you more prone to falling behind on your mortgage.
Mortgage lenders prefer that you owe your house to them and no one else. The lender may also want to see a bank statement proving that the down payment funds exchanged hands, or —
The gift letter may allow the donor to avoid paying a hefty federal gift tax on the transfer. Without the letter, the IRS could tax the donor for up to 40% on the gift amount.
Mortgage gift letter template
A mortgage gift letter must include:
- The name of the mortgage borrower
- The donor's name, address, and phone number
- The donor's relationship to the borrower
- How much is being gifted
- A statement saying that the gift is not to
be paidback. (Because if it is, then it's not a gift!)
- The new property's address
Here's a good mortgage gift letter template you can use:
To whom it may concern,
I, John Doe,
I certify that this payment is a gift
I have given the gift from the account listed
The source of this gift is:
[Type of account]
[Name of financial institution]
321 Avenue Street
(123) - 456 - 7890
When would you use a mortgage gift letter?
Young couples might look into first-time
The couple could put up a smaller down payment, but it’s typically recommended that a buyer put at least 20% down ($100,000 for a $500,000 home) to lower your monthly mortgage payment — and avoid having to pay private mortgage insurance, too.
Asking for help is
Mortgage gift rules and restrictions
The main restriction implemented by the IRS limits the amount of money that’s gifted from one person to another.
In 2019, parents filing a joint tax return can gift up to $30,000 (for a mortgage or any other reason) per child. Another family member, like your uncle or sister, can give you up to $15,000 per year with no tax consequences. The lifetime
Amounts exceeding the limits are subject to the crushing up-to-40% gift tax.
For conventional mortgage loans, a down payment gift
- Parents (step and foster parents too)
- Aunts and uncles (great or step included)
- Niece or nephew (step included)
- Grandparents (great, step, or foster included)
- Cousins (step or adopted included)
- In-laws (which includes your spouse’s grandparents, aunts, uncles)
- Child (step, foster and adopted included)
- Sibling (step, foster and adopted included)
- Domestic partner
Future in-laws can sometimes contribute, too.
Anyone else in a special relationship with the homebuyer --- such as godparents or close family friends — must provide evidence of their relationship.
When making down payments of less than 20%, gift-recipient home buyers must pay at least 5% of the sale price with their own funds.
Low-down-payment mortgages and gifts
The rules can be
For example, VA home loans, available to active members of the U.S. military and veterans, require no down payment. But the borrower may
USDA mortgages, offered to homebuyers in rural and some suburban areas, also do not require a down payment. As with VA loans, USDA mortgages allow the option of making a down payment, and all of that money can come from gifts.
FHA mortgages offer down payments as low as 3.5% and flexible mortgage benefits. With an FHA loan, mortgage down payment gifts can come from both friends and family members.
Remember that any gift given requires a gift letter to reassure your lender
When can you use
down payment gifts?
But down payments for investment properties can never
If you’re receiving a mortgage gift or are planning on gifting a down payment to your child or another relative,
And talk to your family members, too. Make sure they understand everything beforehand.