A Gift Letter is an excellent way to get help with a down payment for your home. Only relatives are allowed to give you gift money, and your spouse or fiance are considered relatives for gifting purposes. However, regardless of your loan type and the amount of gift funds used, it is crucial that you provide the necessary documentation to verify the funds.
We see this most often when parents want to assist their kids with buying a home by providing them money. We see it even more often as a gift from a wedding. But when you’re talking about receiving funds for a home purchase, your mortgage lender will need to know where the money is coming from.
How do I document the Gift Letter money?
Providing a proper paper trail is critical. Lenders need to see how the money is being given to the borrowers.
Every mortgage lender will be a little different. But they will likely be able to provide you with a template you can use. The following information must be included in the Gift Letter:
- Name of borrower(s).
- Relationship to gift giver. Typically a family member is the requirement.
- Amount of gift funds.
- Address of the property.
- Name, current address, phone number of the gift giver.
- Signatures and date signed for gift giver and gift receiver.
- A statement that all parties consider the funds involved a gift from the gift giver and there is no obligation for repayment.
Here is an example of a gift letter template we use:
You will also need a copy of the account statement for the gift giver showing they have the funds to give. For example, if the gift is $10,000 from a parent, that parent must provide the full bank statement showing he/she has $10,000 to give. We recommend using a cashier's check for the gift. Borrowers make a copy of the check and deposit the funds into their account where the down payment will be coming from at closing. Make sure to make a copy of the deposit. Get an activity statement for that account from the date of the last regular statement up to the date of the gift showing the deposit and new balance. The deposit cannot be shown as pending - some banks show the transfer of funds that way for a day or two. If that happens at your bank, get the activity statement through the date where pending is removed.
As a rule of thumb, you will want to have the money documented and in your account for at least 60-days to avoid running into any issues with your mortgage lender.
Who is allowed to provide gift money?
IMPORTANT: Only relatives are allowed to give you gift money. Your spouse or fiancé are considered relatives for gifting purposes, but not a friend or the person you're dating.
As far as what relative can provide you gift money, it depends if you’re getting a Conventional or FHA Loan.
For a Conventional Loan:
- Spouse or domestic partner
- Child or other dependent
- Parents and grandparents
- Aunt or uncle
For all of the above, the borrower may be related by blood, marriage, adoption, or legal guardianship. The donor may not be, or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction.
For an FHA Loan:
- Member of the borrower’s family.
- The borrower’s employer or labor union.
- Close friend who has a “clearly defined and documented interest” in the borrower.
- Charitable organization.
- Governmental agency or public Entity that has a program providing homeownership assistance to low or moderate income families or first-time home buyers.
How much of the gift money can I use?
Before you start passing the hat at your next family gathering, keep in mind that the amount of gift funds that can be used for a down payment is limited. The limits depend on the type of loan.
For a Conventional Loan:
- You can only use the gift money for primary or secondary homes.
- You can use gift funds to cover a down payment up to 20%.
For an FHA Loan:
- You can only use the gift money for a primary home.
- You can use gift funds to cover your entire 3.5% down payment.
What if the gifter doesn’t want to show their bank statements to confirm they have the money?
This is fairly common. Many times, the gifting party does not want their relative to see their bank information. However, the lender needs this to include the gift in funds available to close. The lender is going to know about it because there will be a big deposit in the borrower’s account that will require explanation. The gifting part can send the bank statement directly to the loan officer and emphasize they do not want the receiving party to see it.
What else do we need to know?
Have your lender calculate the cash to close before you ask for the amount of money you think you’ll need. You should do this when you apply. You’ll get a cash to close number. Subtract the borrower’s actual funds from that and the balance should be the amount of the gift.
Again, start moving the money as soon as possible. Be clear on the document the amount the lenders want. Don’t deviate from the documentation requirements without discussing with your lender first and getting an agreement that what you are asking is okay. Don’t spend any money in your account for something you don’t need before you close. Keep your cash balance as high as possible.
Have specific questions that need answering or a situation you need insight into?
Feel free to leave a comment below. Many times, your question is one another home buyer will also need an answer to. Otherwise, you can email me directly at firstname.lastname@example.org or call us at 855-610-1112.
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