Gift Letters For Your Mortgage: A Guide

Mar 29, 2024

8-minute read

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Has a generous relative given you down payment money for a wedding gift or graduation? It’s likely that you’re extremely grateful for the gift money, and that’s completely understandable.

But do you know how to use the gift money appropriately to purchase a home? Here we’ll straighten out the details, help you understand the tax burdens of using a gift of cash (as opposed to a gift of equity) for your down payment and show you how to minimize your liability.

If Someone Gives Me Money, Why Do I Need A Mortgage Gift Letter?

Let’s say someone gives you money to use as a down payment or to help with closing costs. As long as you have the money, your lender shouldn’t care about the source – right?

Many homeowners assume that as long as they have a down payment that’s large enough to meet a lender’s standards, they’ll have no trouble getting a loan. Unfortunately, this isn’t always the case.

Lenders need to know that you have the means to pay back your loan. If you have a large gift you want to use for your down payment, you might run into trouble during the underwriting stage of getting your mortgage.

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Mortgage Gifts And The Underwriting Process

Underwriting is the process that lenders use to verify your income and assets before they give you a loan. It helps a lender make sure they aren’t giving a loan to someone who can’t pay it back.

When you start the underwriting process, your lender will ask you for bank account statements, tax documents and W-2s. These documents prove your income and the assets you have in your bank account.

You may need to provide more than a single month’s worth of bank statements. This is because lenders want to see what kind of money you’ve had in your account for a long time and which assets are new.

Large financial gifts create a problem if they’ve been in your account for less than 2 months. If a lender sees a sudden influx of cash, it could trigger some red flags.

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How To Use Gift Money For Your Down Payment

The lender needs to know the money that came into your account is a gift, not a loan. Loans hinder your ability to pay back your mortgage and add an additional layer of risk for the lender. In addition, the government has strict rules in place to prevent money laundering and other financial crimes.

Prove The Source Of Your Down Payment/Mortgage Gift

Can’t prove the money you’re using for your down payment is a gift and not a loan? Your lender might deny you a mortgage.

The solution is to ask for a gift letter to accompany any large financial gift you use for your down payment. A mortgage gift letter is a statement that assures your lender the money that came into your account is a gift and not a loan. The person who gave you the money must write and sign the gift letter as well as provide their personal information.

Know The Limits On Gift Money

How much money do you need to receive before a gift letter is necessary? Do you only need a gift letter for deposits that are more than $10,000? What about the relative who gave you a card with $50 – do they need to provide a gift letter?

As a general rule, lenders will want you to explain any gift you receive that’s over half the value of your total household monthly income. For example, if you earn $4,000 a month from your salary, your lender will want you to explain any gifts you receive that are more than $2,000.

This standard guideline applies to conventional loans, VA loans and jumbo loans. For a USDA loan1 or FHA loan, your lender will want an explanation for any deposit that’s larger than 1% of the adjusted purchase price or appraised value of your home, whichever is larger.

Be Ready For Lenders To Investigate

A mortgage gift letter isn’t always the only evidence needed to prove that the money in your account is legitimate. Your lender might contact your donor and ask them to provide withdrawal and deposit slips to verify the transaction. These slips tell the lender your relative had the money in their account before they gave it to you and that they haven’t taken out a loan to fund your down payment.

You can take a few steps ahead of time to make sure your gift letter passes your lender’s standards. We’ll also show you how to write a gift letter with a gift letter template so you can help your donor prepare for underwriting.

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Mortgage Gift Letter Regulations By Loan Type

The amount of money you can accept in a gift for your down payment varies depending on the type of loan you get. Let’s take a look at how your loan type can affect your gift money.

Conventional Loan

Conventional loans owned by Fannie Mae and Freddie Mac only allow you to use mortgage gift money that comes from members of your family. In the context of getting a mortgage, family members include:

  • 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
  • Godparents (Fannie Mae only)
  • Relatives of your domestic partner (Fannie Mae only)
  • Former relatives (Fannie Mae only)

FHA Loans

Like a conventional loan, FHA loans allow almost all of your family members to provide you with a mortgage gift for your down payment. The only difference is that normal FHA guidelines say you can’t use gift funds from cousins, nieces or nephews.

However, FHA guidelines do allow gifts from close friends who show a clear interest in your life. This can extend to family members you’re close with (such as cousins, nieces and nephews), close friends and even ex-spouses.

FHA guidelines also state that you may receive gift funds from:

  • Your employer
  • Your labor union
  • A charitable organization that provides financial assistance
  • A government agency or public entity that provides home buying help to first-time home buyers

USDA And VA Loans

USDA and VA loans don’t have many restrictions on gift mon