Gift letter: What it is and how to write one

Think of a home as a kind of gift to yourself – one that keeps on giving. But there’s another type of present that comes in handy when you are learning how to buy a house: gift funds from loved ones, friends, or other parties that can be used for your down payment, closing costs, or reserves in escrow.

The only catch is that you’ll need a gift letter for your lender that confirms the money doesn’t need to be repaid and that it is not a gift of equity unless otherwise documented.

Learn more about a gift letter for mortgage lenders, what they include, why they are needed, loan type rules, and use our handy mortgage gift letter template below when you are ready to apply for a mortgage.

What is a gift letter?

A gift letter is exactly what it sounds like: a document that explains how you obtained a cash gift from an eligible party to be used for your down payment, closing costs, or reserve funds.

This letter will clearly indicate that you are not required to repay the down payment gift and that the funds are not a loan. It should state who gave you the money, your relationship to them, the exact amount gifted, the date of the transfer, and the property address.

"Your lender will be reassured by this document that your debt-to-income ratio is accurate and that there are no hidden liabilities," says Dennis Shirshikov, a professor of finance and economics at City University of New York, Queens College.

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 offering a loan to someone who can't pay it back. Your lender will need this gift letter for the underwriting process.

Why do I need to write a gift letter?

Lenders need to know you can repay your loan. Consequently, they will carefully review your finances, available funds, and total assets.

If you receive a monetary gift intended to help you buy a home, the lender wants to know who the benefactor is, your relationship with that party, and the gift amount you received.

Creating, signing, and sending a gift letter to your lender safeguards you from liability. It validates that the funds are a true gift and there's no repayment expected. The letter also supports other documentation you provide to your lender that proves your available assets.

“Your lender might categorize the funds as a loan in the absence of a gift letter, which would change your financial profile and endanger loan approval," Shirshikov says. "The letter protects both you and your lender by offering transparency, making sure you aren’t taking on more hidden debt, and assisting the lender in confirming the legitimacy of funding sources."

Mortgage gift letter template

You can ask your lender for a boilerplate gift letter template to fill out if you plan to use a gift for your down payment, closing costs, or reserve funds in escrow.

Alternatively, you can use a template, enter your own information, have your donor sign it, and then provide it to your lender.

Here's a sample gift letter template:

[Donor name, address, phone number, and relationship to recipient]

[Your name as recipient and new property address]

[Dollar amount of the donated gift and date the gift was or will be given]

[Indicate whether you will use (or have used) a portion of the gift for your earnest money deposit]

By signing this gift letter, both the donor and recipient confirm that they didn’t receive the gift funds from any person, business, or entity that has any interest in the property being sold or any person connected to the transaction (such as the seller, real estate agent, builder, mortgage banker, or any entity associated with them), except where permitted by the loan program (such as FHA, VA, or USDA loans. The recipient and the donor also agree that the gift need not be repaid.

[Your Signature] Date

[Donor signature] Date

Gift letter requirements, by loan type

The amount you can accept as a gift payment varies depending on the type of loan you choose.

Gift money typically cannot be applied toward the purchase of an investment property using any of these loan options. With investment properties, a general rule is that dollars must originate from your own funds or other approved sources.

Who can give me money for a down payment?

Curious who is allowed to gift you money you can use toward your home transaction? Here’s a detailed breakdown:

“The good news is that the money can come from extended family members in many cases – such as in-laws, aunts, uncles, or even close friends – if your lender recognizes that the relationship is genuine and the funds are documented properly,” says Andy Kolodgie, a personal finance expert and real estate investor in Austin, Texas.

He adds that FHA loans also allow close friends to provide gift funds, unlike other loan types.

“You have to meet the lender’s documentation standards and clearly evidence the relationship," says Brandon Beatty, owner of Southern Hills Home Buyers in Plano, Texas. "A clear paper trail demonstrating the donor's ability and intent to gift is crucial."

Again, the rules here can vary based on loan type. It’s always best to discuss gift letter requirements with your lender to ensure the donor and their funds qualify.

The bottom line: A gift letter is essential during underwriting

You don't have to go it alone when attempting to fund a home purchase. If your lender and loan type allow it, you can apply donated funds from a third party toward your closing costs, down payment, or escrowed reserve funds. Just be prepared to draft and submit an appropriate gift letter confirming that the funds are a true gift with no strings attached.

Ready to take the first step toward buying a home? Apply today with Rocket Mortgage, which offers a Client Portal where gift letters can be uploaded easily.

¹Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.

As of July 6, 2020, Rocket Mortgage^® is no longer accepting USDA loan applications.