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How to Write a Mortgage Gift Letter

Written by nickel - 13 Comments

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.

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.

Sincerely,
(donor’s name)

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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Published on April 5th, 2006 - 13 Comments
Filed under: Mortgages, Real Estate
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Comments (scroll down to add your own):

$0.05,

Very interesting idea the gift letter.

I have a question, my lenders, in the past, reqquired that downpayment money be “seasoned”. This means that it had been in my possession for more than 90 days.

I wonder how it applies to money gifted from a relative for a downpayment?

Have a wonderful Wednesday,
Making Our Way
Comment by Making Our Way — Apr 5th 2006 @ 5:22 pm
As I understand it, no, the money doesn’t have to be in your possession for an extended period of time. In fact, one lender that I’ve talked to has a template for the letter, and it includes a request for info regarding the account that the gift funds will come from, such that they can verify that the funds actually exist. So in this case, the funds don’t even have to be in your possession yet. They just want proof that the funds exist and that you will have access to them. As far as the money being ’seasoned’ goes, that’s probably to get the deposit outside the range of what the underwriter will look at in terms of account statements. If they see a large deposit, they’ll want to know where it came from. If the funds appear to have been there all along (because you made the deposit over 90 days ago), they’ll just assume that it was your money in the first place.

Comment by nickel — Apr 5th 2006 @ 5:29 pm
It was a long time ago…so I may be forgetting exactly how it went, but my wife and I got a gift from her parents to buy our first house and we didn’t need a letter. I think that they did ask us about it, but didn’t require a letter. I could be wrong though.
Comment by RS — Apr 5th 2006 @ 7:46 pm
Gee that gift letter sure looks familiar…
Comment by jim — Apr 7th 2006 @ 8:14 am
Hah! Just searched your site and found your example. I guess there’s not many ways of saying it. However, our mortgage broker did end up sending a much more complicated form that asked for the donor’s bank account info, etc. I guess that’s to be sure that the funds are available if you haven’t deposited them yet. Much easier to stick with the simple letter, though, if it’s clear that you already have the funds.

Comment by nickel — Apr 7th 2006 @ 7:57 pm
What is the benefit of submitting this letter versus not submitting it and taking the loan from a family member “off the record”
Comment by Akhil — Apr 10th 2006 @ 11:31 am
I am a Sr. Processor for a mortgage company, and often the closing monies do need to be “seasoned” usually 60days, but sometimes 90days. but not for gifts, expecially if it’s a gift of equity.

As for having the money given to you “off the record” this is the better way to go, if you have someone whose willing to give you the money ahead of time, deposit it in your bank right away so that you can meet the “seasoning” requirement. It is better to go this route if possible as more programs will be available to you.
Comment by amanda — May 15th 2006 @ 4:28 pm
I have a customer who is actually purchasing a property from a relative. The balance on the mortgage being $101,000…the selling price is $150,000. The property, though, is appriaised at around $400,000. The lender wants a “gift letter” from the seller. (These are two cousins.) How should the gift letter be drawn up? What needs to be stated in the letter?

Maria (Savannah)
Comment by Maria West — Aug 18th 2006 @ 8:43 am
so regarding the gift equity….will the seller be taxed on the purchased price when really they only recieved the purchase price minus the gift equity? or can they write of their gift equity?
Comment by Fifi Sani — Dec 6th 2006 @ 12:15 am
But what If the donation if from a non-relative such as a future father in law???
Comment by lucky — Oct 10th 2007 @ 9:45 am
Lucky: A gift is a gift. They’re worried that a bunch of money that suddenly appears in your account might be an under the table loan, which would make you a bigger risk. I would imagine that he could just say that he’s your future father-in-law, and that he’s giving you a gift to be used toward the purchase of a home. They just want to be sure that you’re not over-extending yourself by borrowing money from other people and using that as your down payment. They want the down payment to be *your* money (gift or otherwise).

Comment by nickel — Oct 10th 2007 @ 11:24 am
My limited understanding of the gift tax law is that a gift will not get you into “hot water” with the IRS unless you do not claim said gift on your income tax return (form 709). You can give up to $12,000 per giftee tax-free. The remainder of the gift is subject to a gift tax, however, the tax can be applied against the unified tax credit (the most you can give in your lifetime). For example, you give your daughter and your son-in-law each $25,000. The first $12,000 each is exempt. The remaining $13,000 each, or $26,000, is subject to a gift tax of about $5,000. You apply this to your unified tax credit, and do not have to “pay” any additional taxes, simply use form 709. Of course, you have reduced by $5,000 the amount you can exempt for future gifts or your estate upon your passing. The recipient has no income tax ramifications from a gift. Assuming your estate is not over $2 million, it probably can’t hurt to take advantage of this method of gifting. Please correct me if I am wrong.
Comment by Cristie — Jan 17th 2008 @ 3:20 am
okay, i have a question and i would really some help.

here’s the scenario. my husband and i just got married (about 2 months ago) and have found a house. unfortunately his credit is bad so we opted to take out the mortgage under my name only. our parents are each offering to lend us 15K for the down payment with the understanding that we will pay them back within 7 years. Now, the bank has approved me for the price of this home (which we are in contract for), with the understanding that i will be putting 20% down. With these loans from our parents we’re in the clear, but our parents don’t want to sign the gift letter saying that this is a full gift because this is not the case. we have only 2 weeks until our closing date.

what can we do about this? is there any way around the gift letter? do all lenders ask for a gift letter?
Comment by needs help — Jul 17th 2008 @ 1:12 pm