Some borrowers may receive their down payment as a gift. While this is acceptable, it does require a gift letter from the person who gifts the funds. The gift letter is one of the important documents for the approval process. Lenders will need to ensure that the letter includes the necessary information to process it smoothly.
Can Borrowers Receive a Gift From a Parent?
Buying a house requires the approval of a mortgage, as well as a down payment. Depending on the value of the home, a down payment can be a significant amount of money. It may be as much as 20% for a conventional mortgage. Some borrowers may also choose to put even more down on their mortgage to reduce their monthly payments.
Some borrowers may receive these funds as a gift, either from a parent or another family member. Eligible family members that can gift down payment funds might include a spouse, parents, grandparents, aunts, uncles, nieces, nephews, cousins, in-laws, children, siblings, domestic partners, or a fiance. If this is the case, the borrower will need a gift letter, addressed to the lender.
However, which government entity backs the loan will determine who is, and is not, eligible to gift a down payment. FHA, conventional, USDA, and VA loans all have different eligibility as to which family members are eligible to gift the funds. There are also eligibility differences depending on whether the buyer is buying a primary residence, secondary property, or investment property. There are no limits as to how much money someone can gift.
Lenders may find it difficult to organize each of the varying requirements of a gift letter. For this reason, it can be helpful to find a way to automate the gift letter system. By inputting specific gift letter requirements into the Lendsmart platform ahead of time, based on the type of lender, they can ensure that borrowers are meeting the specific requirements of that particular lender.
Important Elements of a Gift Letter
Borrowers need to demonstrate that the funds received for the down payment are not a loan and are instead a gift. If the funds were a loan, it would increase the borrower’s debt-to-income ratio, stretching their means further, which could make it difficult to make their payments. The gift letter is used to distinguish the funds received as a gift, and not a loan. The gift letter should include the following:
- Personal details: The letter should include the gift giver’s name, address, and phone number.
- Written by the person giving the gift: A gift letter should always come directly from the person giving the gift funds.
- Relationship: The person should also specify their relationship to the borrower.
- Type of gift: The family member should also specify the type of gift. This could include cash, check, title, or stocks. This includes the value, or total, of the gift given.
- Date funds were given: it is also important to include the date on which the gift was given.
- Signature of the giver: The family member should also sign the letter with their legal signature.
- Address of the property: The letter should include the address of the property.
- Copy of bank statement: Most lenders will require that the person giving the gift also show documentation of the bank account, verifying that the funds came from it.
It is important to note that large sums of money received as a gift are subject to state and federal taxes.
As you can see, a gift letter requires different elements. It is the lender’s responsibility to ensure that the gift letter includes each of these elements. Otherwise, the underwriter may request additional proof or the loan could ultimately be denied.
How To Handle Multiple Gifts
Some life events, like weddings or graduations, can lead to a large collection of gift money from multiple people. Some lenders and borrowers may wonder if they need a gift letter for each gift.
Most lenders require a gift letter for any gifts that exceed 50% of the borrower’s total monthly income, as well as gifts that exceed 1% of the appraised value of the home. Of course, the underwriter may also request additional information on any gift deposits that don’t align with the borrower’s finances.
For this reason, obtaining an appraisal on a potential home may be necessary before receiving the gift letter. Small exceptions or requirements like this can complicate the lending process. Most lenders are working with multiple borrowers at one time, with each of them at different phases of the buying and lending cycle. If a borrower receives multiple gifts from multiple sources, this can also slow down the process, unless there is a system in place to prevent that.
Optimization of the lending process can improve the task of collecting all required documents, including gift letters. By maintaining documents online, both borrowers and lenders are notified of what documents they need to submit and when.
How To Speed up the Process
With the gift letter being just one of the required documents of a mortgage, it is important that lenders identify ways to make the process more efficient. Certain products, like automation or the use of artificial intelligence, can speed it up. Additionally, some lenders prefer gift letters to look a certain way. By providing borrowers with a template to use, you can ensure that the letter includes each of the important points.
Sample Gift Letter for Mortgage
Here is a sample of a mortgage money gift letter:
I, [Family Member Name], certify that I will give a gift of [Gift Amount] to [Borrower Name] on [Date of the Gift]. I am related to the borrower by [Relationship Type]. This gift is for the purchase of the property located at [Property Location].
I certify that this is a gift and there is no obligation of repayment, now or in the future. I understand that proof of funds is required and I give authorization to the lender to confirm the funds have come from the account below:
[Bank or Institution Name]
[Legal Name of Gift Giver]
[Signature of Gift Giver]
Gift letters are a requirement if down payment funds are gifted. By establishing an automated system ahead of time, it is possible to make this process, as well as the collection of other documents, more efficient.