Often times a propsective homebuyer can’t come up with sufficient funds for a downpayment in order to qualify for a mortgage on the home they want to purchase. While there are a number of options out there, including no-money down or low-money down mortgages, another alternative would be to procure the necessary funds from a family member.
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In my experience, lenders often frown on using borrowed money to make a down payment (although they do make exceptions in the case of things like 80/10/10 or 80/15/5 mortgages). This is where the gift letter comes in… If a family member is willing to provide ou with funds for the purchase of your house free and clear of any repayment obligation (i.e., a gift as opposed to a loan), then you’re in the clear. You simply need a gift letter from them stating that this is the case. So how do you write a gift letter?
According to CapitalOne Home Loans, a gift letter is defined as:
A letter to the lender from the donor stating a gift of money has been made to the buyer in order to purchase specific property. The relationship of the donor and donee is stated, as well as the amount of the gift.
On top of this, we’ve been told that the letter should also specify that there is no expectation of repayment (I always thought that was implicit when one is talking about a gift, but apparently not).
In view of the above, a gift letter that meets these requirements might look something like this:
To whom it may concern,
The purpose of this letter is to state that I am giving my (relationship between donor and recipient), (recipient’s name), a gift of ($XX,XXX) to be used toward the purchase of a home. There is no expectation of repayment of this gift.
The letter should also be signed and dated.
As a side note (and no, I’m not recommending this), I heard from our mortgage broker that the gift letter is used solely for underwriting purposes, and that no information is forwarded to the IRS. Assuming this to be true, it’s conceivable that you could work around the loan vs. gift issue without getting into hot water regarding gift taxes. For example, consider the case of a no-interest loan from a family member (more on this sort of thing in a future post) wherein the provider of said loan agrees to furnish a gift letter for underwriting purposes, making it ‘officially’ a gift in the eyes of the underwriter, but unofficially an under-the-table loan amongst family members.
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