How to Write a Gift Letter for a Mortgage: A Complete Guide
Securing a mortgage is a monumental step, and sometimes, a little financial boost can make all the difference. This is where a gift letter for a mortgage comes into play. But what exactly is it, and how do you write one? Let’s dive in.
What is a Mortgage Gift Letter?
A mortgage gift letter is a crucial document in the home-buying process. It’s a formal statement from a relative or friend who is gifting funds to help you cover the down payment, closing costs, or sometimes, even reserves. These funds are considered a gift, meaning they are not a loan and don’t need to be repaid. This distinction is critical for lenders, as they need to verify the source of the funds and ensure the borrower’s ability to repay the mortgage.
Why Are Gift Letters Necessary?
Lenders scrutinize every aspect of your finances. They want to know where the money for your home purchase is coming from. Without a gift letter, the lender might view the funds as a loan, impacting your debt-to-income ratio (DTI) and potentially affecting your mortgage approval. A gift letter clarifies the nature of the funds, reassuring the lender that it’s a genuine gift and won’t create an additional financial burden on you.
Essential Elements of a Mortgage Gift Letter: What to Include
Crafting a compliant gift letter isn’t overly complicated, but it’s essential to get it right. Here’s a breakdown of the key components:
1. Donor’s Information
The letter must clearly identify the donor. This includes their:
- Full Name
- Address
- Phone Number
This information verifies the donor’s identity and allows the lender to contact them if needed.
2. Recipient’s Information
Similarly, the letter should include your information, the mortgage applicant:
- Full Name
- Address
- Phone Number
- Loan Number (if already available)
This section links the gift directly to your mortgage application.
3. Relationship Between Donor and Recipient
The letter should explicitly state the relationship between you and the donor. Common examples include:
- Parent
- Sibling
- Grandparent
- Close Friend
This helps the lender understand the context of the gift.
4. Amount of the Gift
Specify the exact dollar amount of the gift. This is a critical element. It’s best to use both numbers and words to avoid any ambiguity, for instance, “$5,000 (Five Thousand Dollars).”
5. Source of Funds
The gift letter should state where the funds are coming from. For instance, “The funds are being gifted from my savings account at [Bank Name].” This helps the lender trace the funds.
6. Purpose of the Gift
The letter should clearly state the purpose of the gift. Common examples include:
- Down Payment
- Closing Costs
- Funds for Reserves
This informs the lender how the funds will be used.
7. Statement of No Repayment
This is perhaps the most critical statement. The donor must explicitly state that the gift is not a loan and that there is no expectation of repayment. For example: “This gift is a genuine gift and does not require repayment.”
8. Date and Signature
The letter must be dated and signed by the donor. This confirms the donor’s agreement to the terms stated in the letter.
Step-by-Step Guide: Writing Your Gift Letter
Here’s a practical guide to help you create a gift letter:
- Gather the Necessary Information: Collect all the required details mentioned above: donor and recipient information, relationship, gift amount, source of funds, and the purpose of the gift.
- Draft the Letter: Use a template or example (many are available online – see examples below) as a starting point. Be sure to include all the essential elements.
- Review and Revise: Carefully review the letter for accuracy and clarity. Ensure all information is correct, and the language is straightforward.
- Sign and Date: The donor needs to sign and date the letter.
- Provide to the Lender: Submit the completed gift letter to your mortgage lender along with the other required documents.
Example Gift Letter Template
Here’s a basic template you can adapt:
[Date]
[Lender’s Name and Address]
Subject: Gift of Funds for Mortgage Loan - [Your Name] – [Loan Number, if applicable]
Dear [Lender’s Name],
I, [Donor’s Full Name], residing at [Donor’s Address], am writing to confirm that I am gifting [Your Full Name], residing at [Your Address], the amount of [Dollar Amount] ([Written Amount]) for the purpose of [Down Payment/Closing Costs/Reserves] for the purchase of the property located at [Property Address].
I am the [Relationship to Recipient] of [Your Name]. The funds will be transferred from my [Savings/Checking] account at [Bank Name].
This gift is a genuine gift and does not require repayment.
Sincerely,
[Donor’s Signature]
[Donor’s Printed Name]
[Donor’s Phone Number]
Common Mistakes to Avoid When Writing a Gift Letter
Avoiding these common pitfalls can ensure a smooth mortgage process:
- Incorrect Information: Double-check all names, addresses, and amounts for accuracy.
- Lack of Clarity: Use clear, concise language. Avoid jargon or ambiguous statements.
- Missing Essential Elements: Ensure all the required components (relationship, purpose, no repayment statement) are included.
- Incorrectly Sourced Funds: The lender will need to verify that the funds are coming from the donor’s own account.
- Late Submission: Submit the gift letter promptly to avoid delays in the mortgage approval process.
Gift Letter and Gift Tax Implications
It’s important to be aware of potential gift tax implications. The IRS has an annual gift tax exclusion. For 2024, you can gift up to $18,000 to any individual without incurring gift tax. Married couples can gift up to $36,000 combined. If the gift exceeds these limits, the donor may need to file a gift tax return, but in most cases, no tax will be owed. Consult with a tax professional for specific guidance.
Receiving a Gift vs. Lending Money: The Key Differences
The fundamental difference lies in the expectation of repayment. A gift has no strings attached; it’s a one-time transfer of funds with no repayment obligation. A loan, on the other hand, creates a debt that must be repaid, usually with interest, according to a pre-agreed schedule. Lenders treat these two scenarios very differently when assessing your ability to repay the mortgage. A gift boosts your buying power without increasing your debt, while a loan adds to your liabilities.
Frequently Asked Questions About Mortgage Gift Letters
Here are some common questions people have about gift letters:
What if the Donor Lives in a Different State? The location of the donor does not affect the validity of the gift letter. It’s the information within the letter that matters.
Can I Use Gift Funds for the Entire Down Payment? Yes, depending on the loan type and the lender’s requirements, gift funds can often be used for the entire down payment. However, you might need to contribute some of your own funds.
How Long Does it Take to Get a Gift Letter Approved? The approval process for a gift letter is typically quick, often taking only a few days, provided all the necessary documentation is submitted correctly and the funds are verified.
Do I Need to Provide Proof of the Gift? Yes, the lender will require proof of the gift transfer, such as a copy of the check, wire transfer confirmation, or bank statement showing the funds being transferred.
What if the Donor is Not a Relative? It’s still possible to receive a gift from a non-relative, like a close friend. The lender will typically have the same requirements for documentation, but the relationship might be more carefully scrutinized.
Conclusion
Writing a gift letter for a mortgage is a vital part of the home-buying process when receiving financial assistance from someone. By understanding the requirements, including the correct information, and avoiding common mistakes, you can ensure a smooth and successful mortgage application. Remember to be clear, concise, and accurate in your letter, and always consult with your lender for specific guidance. The gift letter, when done correctly, paves the way for your dream of homeownership.