It is common for a homebuyer to receive a financial gift from family members, relatives, or even close friends. However, there are some rules that need to be followed in order to use it for a down payment. Follow this real estate gift letter template to avoid any hassles when buying your new home.
We have a free downloadable letter that most mortgage lenders will accept. We have also compiled the different rules and regulations that need to be followed when gift funds are used for a down payment or applying for a mortgage.
What is a Gift Letter in Real Estate?
When applying for home loans, lenders check into your financial status to determine if you can pay back the loan. They want to see if you are solid or if you are too great a risk.
Lots of different factors are used including your credit score, how much you earn, and how much debt you have.
You supply the lender with your recent bank statement, paycheck, and other financial documents, and they will verify everything.
One important thing is your debt to income-ratio. Lenders look at this to make sure you have enough money to pay back debts you have already agreed to (like car loans, credit cards, and student loans) in addition to you new mortgage debt.
The Mortgage lender needs to make sure that any monetary gift you receive, does not need to be paid back. That would affect your debt to income-ratio. This is why gift letter documentation is needed. Any additional burden you may have that affects your mortgage payments are examined.
Check with your lender to see if your loan program doesn’t accept gift payments. I’ll bet they do.
Finally, this letter only applies to a cash gift. You can also receive equity, but that’s another topic. This letter applies to any form of cash you may get to help in buying a house.
Gift Letter Rules for Different Loan Types
Depending on the type of loan you are getting, there are different requirements. Here are just a few. It is important to talk with your loan officer. Each lender may have different rules to follow as part of the process. Talk with them early on, as any issues with your loan processing can cause delays in your closing and getting the house.
While there aren’t any defined rules for how much is considered a “Gift”, most lenders will want an explanation for any amount you receive that is half your monthly income. Example: Your monthly income is $5,000, so any gift over $2,500 will require a gift letter.
Gift Letter Rules for FHA Loans
FHA loans allow you to receive a gift from any family member (except cousins, nieces, and nephews). Additionally, you can receive a monetary gift from someone who is involved in your life. This could include employers, friends, and even ex’es. FYI, the benefit of a federal housing administration loan is that your credit doesn’t need to be perfect, and you can have lower down payment options, too.
Gift Letter Rules for Conventional Loans
Conventional Loans can accept Gift Letters from any family member: Your spouse, Your parents (biological, adoptive, step- and foster parents all qualify), Your grandparents or great-grandparents, Your aunts and uncles (including step-relatives), Your cousins (including step-relatives and adoptive relatives), Your nieces and nephews (including step-relatives), Your in-laws (including parents, grandparents, aunts, uncles, brothers-in-law, sisters-in-law and future in-laws), Your children (biological, adoptive, step- and foster children all qualify), Your siblings (including step-relatives, foster and adoptive siblings), Your domestic partner, Your fiancé or fiancée.
Gift Letter Rules for VA Loans
There are very few restrictions for accepting a monetary gift when getting a VA Loan. The only exception is that the person giving the money may not be an interested party or person who has a vested interest in the sale. Examples of this are: The person selling the home you’re buying, The person or company who built the home you’re buying, The developer of the home you’re buying, Your real estate agent or the seller’s agent.
Gift Letter Rules for USDA loans
The rules for accepting a gift when applying for a USDA loan are the same as for a VA loan above.
Does a mortgage gift letter get reported to the IRS?
If the gift for the down payment is less than $16,000 it is not required to be reported to the IRS.
Is a Gift Letter Legally Binding?
Yes, A gift letter is legally binding. Here’s why. Mortgage fraud is a real thing. Lying on your mortgage application is mortgage fraud. By not being truthful about where your down payment funds are coming from, you are committing fraud. The Gift Letter is considered a legal instrument because it is signed stating the money is not considered a loan.
What needs to be included in a gift letter?
Each lender may require different components of a gift letter, but most require these six things:
- The total dollar amount of the gift
- The date the funds were transferred
- A signed statement saying no repayment is expected from the donor
- The donor’s contact info including: name, address, and phone number
- The gift donor relationship to the borrower/buyer
- The address of the property being purchased
How Much Can My Parents Gift Me for a House?
There are a few things to keep in mind when donating or receiving a gift payment.
The biggest one is that the person making the gift needs to be on the accepted list of people, depending on the loan type. For instance, if your cousin wants to make a payment gift and you are getting an FHA loan, that would NOT be allowed (cousins are not allowed to gift under FHA rules). Other family members would be OK though.
Also depending on the loan type, you may be able to get the entire down payment as a gift. FHA does allow the entire down payment to be gifted. Conventional loans require that the homebuyer pay some amount out of their own pocket if they are putting down less than 20%. Your lender can explain more, as the amounts and percentages change depending on the conditions of the loan.
How do you Prove Gift Money for a Mortgage?
The easiest way to prove gift money is to use the template I’ve provided or to craft your own letter using the 6 steps above.
I also recommend that you be open and upfront with your loan officer during the process, and tell them at the beginning that some (or all) of the downpayment was a gift. Payment Gifts could have strings attached, and lenders want to make sure that it doesn’t come with any repayment conditions.
Also, you will be required to show recent bank account statements to your lender. They will look for large deposits that may be red flags and require an explanation.
Sometimes the donor may need to supply deposit slips to prove that the money came from their account.
Freddie Mac guidelines for Gift Payments
Fannie Mae and Freddie Mac are the major financing companies for home mortgages in the US.
Freddie Mac has some guidelines for gift payments: your entire down payment can be gifted by a relative if you’re buying a single-family home as your primary residence.
Can I use Gift Money for a Second Home?
As long as the money comes from an approved donor (see the list above) it can be used for a First Home purchase or a second home purchase. It also usually doesn’t matter if it is for a single-family house, a condo, duplex or other property type. When looking at second or investment properties, I recommend always checking how much money the place will generate as cash flow. You don’t want to make a bad deal.
Can I use Gift Money for Closing Costs?
Yes, you can use gift money for closing costs. When you receive a down payment gift, it can be used for the down payment or to pay other closing costs like title insurance, lender fees, Prepaids, and other associated closing fees.
Download the free Real Estate Gift letter Template
We have provided this template as a google doc. You can download it and use as is, or you can edit it in Word or any other program you prefer. I recommend saving it as a PDF and then sending the payment gift letter to your mortgage agent. You may need to have a family member sign it, and also get some information from them to be in compliance. But it is worth it!
A good real estate agent will prepare you by providing a real estate gift letter template. Make sure that the version they share with you has all the essential parts so there won’t be a delay in getting you loan and closing on time.