If you received a monetary gift to help with your mortgage down payment or closing costs, then you’ll need a gift letter from the donor saying you don’t have to pay it back. The letter should make clear the money is a gift and not a loan.
"The gift letter acknowledges the source of the funding and, more importantly, showing the borrower isn’t responsible for paying the money back," says Julienne Joseph, associate director of government housing programs and member engagement at the Mortgage Bankers Association.
Lenders also use gift letters to verify your gift funds come from acceptable sources, says Bill Banfield, Executive Vice President of Capital Markets, Quicken Loans. Some lenders may permit gifts from only blood relatives, for example.
Knowing how to use gifted funds to purchase a house and what documentation is required can help you avoid delays in unlocking the door to homeownership, Banfield adds.
If you're fortunate enough to receive gift money, here’s what you need to know about putting it toward your home purchase.
Mortgage down payment gift rules
Before you accept a gift or ask friends or family members for help with your down payment or closing costs, talk with your lender about what your loan program allows. The rules for gift money vary by lender and loan program.
Borrowers will need to "confirm how much needs to be paid from their own funds and what can come from a gift or another source of larger deposits," Banfield says.
Certain loan types limit who can give you money for a down payment. "Conventional loans, for example, only allow homebuyers to use funds that come from members of their family," Banfield says.
Because guidelines can change anytime, check with your lender to learn more about specific gift rules.
What information should a mortgage gift letter include?
Your lender should be able to give you a template ensuring your gift letter passes muster, Banfield says.
Rocket Mortgage, a division of Quicken Loans, provides a sample letter to help borrowers draft their own, reminding them to include:
- Name, address and phone number of donor
- Name of recipient and relationship to donor
- Address of property being purchased
- Dollar amount of the gift and date given
- Whether the gift was used toward earnest money
- Confirmation neither donor nor recipient received gift funds from any person or entity connected to the sale, such as the builder or banker
- Acknowledgment the gift money isn’t a loan
- Recipient signature and date
- Donor signature and date
"The homebuyer is responsible for submitting all documentation," Banfield says.
Meaning if you use more than one gift, you’ll need to provide more than one gift letter to the lender, plus proof of donor assets and liabilities.
What else to know about a down payment gift?
Mortgage bankers will want to verify donors can afford to give money toward down payment or closing costs.
"They want to track the sourcing of the funding of the gifter and make sure the person offering the gift has the ability to provide it without putting themselves in financial hardship," Joseph says.
Some people might hesitate to provide their personal financial information when they aren't borrowing themselves, she says.
"The biggest thing is making sure the donor understands they’ll have to provide documentation," Joseph says.
Borrowers must be transparent with donors about the potential need for a paper trail, including bank statements. Some lenders require two months of bank statements, and others might ask for three months of documents or canceled checks.
Whether a donor gives $2,000 or $20,000, the same rules apply: "If money isn’t coming from the homebuyer's own funds, they have to be able to source it," Joseph says.
Avoid closing delays when obtaining a mortgage gift letter
Receiving a gift to help pay for your down payment or closing costs is good news. But good fortune can feel like misfortune in the buying process if you’re not well-informed.
For one, talk with your lender to find out whether a larger gift should sit in your account for a certain amount of time before you apply for a mortgage. "The funds will be less likely to trigger a red flag in this case," Banfield says.
The lender needs to know the money is a gift and not a new loan, which could hurt your ability to repay the mortgage. A bank record offers proof of a gift, which is why donors shouldn’t give cash.
Givers and receivers should understand their responsibilities to prevent holdups during underwriting. The last thing a borrower wants is a roadblock on the way to closing because of a gift should’ve been a relief, not a burden.
Simply tell your lender you'll be using a gift when you apply for a mortgage. "That’ll help expedite the process," Joseph says.
Source: US News