Gift Letter For Mortgage Explained. Crafting a gift letter for mortgage lending is a tricky business. As a rule, strict requirements are in place to safeguard against fraud and provide documentation to ensure the funds given are, in fact, a bona fide gift and not a loan. In this day and age, saving money for a downpayment and closing costs is an arduous task.
Altogether, the chaos surrounding inflation and interest and soaring rental rates find many potential homebuyers turning to close friends and family members for assistance through gifted money for purchasing a new home. As a solution, real estate agents and mortgage lenders often collaborate with these generous gift-givers and borrowers to craft gift letters for mortgage lending and get the ball rolling toward home ownership.
Let’s dive in and discover the intricacies of receiving down payment gifts, which loan types accept gifted funds, and how gift letters assist borrowers and facilitate homeownership.
What is a Gift Letter for mortgage lending?
Gift letters are documents that confirm the transfer of a financial gift from one person to another. The general purpose of these gift funds is to facilitate the purchase of a large ticket item, such as a home purchase, and are typically intended for down payment funds and closing costs. Often, family members, charitable organizations, and domestic partners provide these monetary gifts.
Why does underwriting need a Gift Letter for mortgage approval?
Lenders require the borrower to meet specific loan eligibility requirements, like credit scores, proof of sustainable income, and current debt-to-income ratios. Primarily, the underwriting process ensures that the borrower is financially sound and is unlikely to default on their loan. Therefore, gift letters are a form of documentation stating that the gift money is, in fact, a verifiable gift, and there is no expectation of repayment from the recipient.
Secondly, since repayment of the financial gift would affect the borrower’s debt-to-income ratio (DTI), the mortgage company ensures that the borrower will not use their own funds to repay the donor. Thirdly, mortgage gift letters provide transparency and lending guideline compliance, which further documents the process of alleviating misrepresentation and fraud. Mortgage lenders need proof of where the gifted funds came from. Next, a gift letter should accompany bank statements, a copy of the check or money order, the deposit slip, and any proof of where the money came from.
Lastly, lenders cannot consider funds or gifts from an interested party, like a real estate agent or the home seller, to further prevent fraudulent transactions. For a gift letter for mortgage lending to be approved, the donor’s generosity must be the incentive for the gift, not any ulterior motive.
Tax Implications and Requirements
In the case of taxes and IRS requirements, each year, an estate and gift tax exemption is set per individual. Primarily, the tax liability typically falls on the side of the gift-giver, not the recipient. However, the recipient may owe capital gains tax if they sell the gifted property. This federal excise starts at 18% and can reach up to 40% on specific gift amounts. As a result, consulting with a real estate tax professional before distributing and receiving gift money is advisable.
For 2024, the annual gift tax limit is $18,000. (That’s up $1,000 from last year’s limit since the gift tax is one of many tax amounts adjusted annually for inflation.)
Categorizing Gifts
Of course, plenty of people exchange gifts. However, formal gifting exchanges require documentation, and gift letters often accompany tremendious generosity. The broad definition of gifting is a voluntary transfer, exchange, or sale of property from one entity or person to another without expectation of repayment. Technically speaking, gifts can take many forms.
Here are some examples:
Transfer of ownership
Downpayment assistance
Estate planning
Substantial gifts to minors
Inheritance scenarios
Charitable contributions
Gift tax reporting and taxable gifts
Forgiving debt
Below-market loans/ Gifts of equity
Transferring large sums of real property without expectation of repayment
How Are Gift Funds distributed?
In the next phase of gift-giving, the donor transfers their tangible gift to the recipient. Ultimately, the method of distributing gift funds is dependent on the factors surrounding the nature of the gift. Depending on circumstances, gifted funds are often distributed directly to the recipient in the form of cash, check, bank transfer, gift card, wire transfer, physical assets, or through trust and estate planning.
Writing a Gift Letter for mortgage underwriting approval.
A gift letter template is pretty straightforward. Here are six essential items that the letter must contain.
- Donor signature and recipient signature
- Donor name, address, phone number, and relationship to the recipient
- Explanation that the gift is not a loan and there is no expectation of repayment
- The dollar amount of the gift and the source of the funds gifted
- A detailed explanation if there are restrictions or limitations on the gift
- The date that the gift letter is signed
Why Do Homebuyers Need Gift Money?
For many first-time home buyers, the housing crisis and increasing inflation costs diminish money-saving efforts. In 2024, the homebuying market is intense. With the median home purchase price ringing in at $495,100, most homebuyers must have more than eighteen grand reserved in their bank account for a downpayment. Specifically considering state-by-state statistics, the average home loan amount for financing a primary residence today easily exceeds half a million dollars.
Throughout mortgaging history, the ever-popular, 30-year fixed-rate conventional loan with a 20% downpayment was a standard lending staple. Many homebuyers today, consider the idea of utilizing conventional loans combined with a traditional 20% downpayment as merely a pipedream without assistance from friends and family. For example, imagine a situation in which a creditworthy and fortunate first-time homebuyer receives a gift of $18,000 from their family for a mortgage down payment and then wishes to put the traditional 20% down. The homebuyer only qualifies for a $90,000 property. Thankfully, many alternate lending opportunities don’t require a 20% downpayment.
What if Borrowers and Gift Givers Exceed the gift tax limit?
Unquestionably, receiving eighteen thousand dollars as a gift is incredibly generous and a substantial amount of money. Regarding federal gift tax limits, most Americans will never have to worry about the tax implications of exceeding the annual exclusion of $18,000. Exceeding the limit does not automatically prompt the Internal Revenue Service (IRS). In these cases, the gift-giver must file a gift tax return with Form 706 and file it with the IRS. Additionally, the IRS lifetime exemption limit in 2024 is 13.61 million, allowing these fortunate individuals to gift over thirteen million dollars before accruing any tax liability.
Gift Letter Requirements & Property Types
Surprisingly, home financing is very borrower-friendly, and a variety of lending options don’t require large down payments. Additionally, gifted money and finance a variety of property types. As a rule, specific loan approval requirements are in place to establish credibility for the giver and verify the source of the funds they are gifting to the borrower. These practices prevent fraudulent lending and lower loan default risks for both the lender and the new homeowner. As high-level overview, here are a few lending options, as well as general guidelines for funding property with gifted money.
Single-Family Homes and Primary Residences:
Both the recipient and gift-giver must prove that the funds are freely given and legally sourced. The entire gift can facilitate the down payment requirement.
Second Homes:
Second home gift letter requirements are similar to primary residence requirements. However, borrowers must provide more extensive eligibility documentation due to the additional risk of loan default when financing these properties.
Investment Properties:
Most lender policies prohibit downpayment gifts for financing investment properties. Depending on the loan program used, investors may encounter specific guidelines regarding the source of gift funds, as well as strict documentation requirements.
Conventional Loans:
These types of mortgages require the giver’s signature, stating that the funds are a gift and not a loan. The donor also needs to provide documentation showing the source of the funds, such as bank statements or gift checks.
Federal Housing Administration (FHA Loans):
Gift funds for FHA loans offered by government agencies like Fannie Mae and Freddie Mac must be documented and sourced appropriately. The FHA allows donations from various sources, including employers, labor unions, and charitable organizations. Depending on the gift amount, the donor may need to provide additional documentation.
Department of Veterans Affairs (VA Loans):
Gift funds for the down payment of government-backed loans come with specific requirements regarding who can provide the gift and documentation. In some cases, VA loans may require a statement from the donor affirming that they do not expect repayment.
USDA Loans:
Similarly, USDA loans may allow the use of gift funds for down payments, but they have specific guidelines regarding documentation and eligibility. A gift letter for mortgage financing with USDA loans must typically meet USDA requirements and may require additional documentation.
Organizing a gift letter for mortgage financing
Undoubtedly, buying a home in 2024 is an exciting prospect. First, completing a gift letter for mortgage underwriting approval is only one step in purchasing a property with gifted funds. Overall, professional advice is vital in facilitating the best use of gifted money for buying real estate. By leveraging their expertise and experience, lenders often provide guidance in crafting the perfect gift letter for mortgage lender approval.
Additionally, mortgage professionals optimize the entire loan process by navigating lender policies and explaining eligibility and alternate loan product availabilities. Frequently, questions arise, and experienced lenders often assist borrowers by communicating with the donor directly to simplify the process of transferring funds accurately. Finding a lender who can help is more accessible than many people think.
The steps are simple:
1. Schedule a Call: An experienced loan officer can discuss your lending needs and guide you through the possibilities.
2. Get Approved: We’ll help you through the mortgage application process and facilitate the steps for approval.
3. Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.
With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insiders will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.
