What is a Mortgage Gift Letter?
Saving for a mortgage down payment is a big challenge for many people, especially first time home buyers. That’s nothing new; it’s always been true. Fortunately, many of the most popular mortgage programs allow gifted funds – money given to borrowers, for a mortgage down payment, from approved donors. Gift funds can help borrowers close the financial gap and make purchasing a home a reality.
If down payment gift money is provided to home buyers, both the donor(s) and recipient(s) must sign a mortgage gift letter. Gift letters state that the money changing hands is not a loan. There can be no expectation of repayment. Every lender requires this.
There’s a free, downloadable mortgage gift letter template toward the bottom of this article. It includes all the required fields for any loan program (e.g. Conventional, FHA, VA and USDA loans).
While gift letters all have the same basic information in them, each loan program has different guidelines that donors and borrowers must follow. Here’s what’s covered in this article:
- Down payment gift requirements common to all loan programs
- FHA down payment gift requirements
- Fannie Mae down payment gift requirements
- A downloadable mortgage gift letter template
During the loan process, your loan officer is going to help you get your mortgage gift letter and other required loan documents squared away. Nothing about this process should be intimidating. It’s actually quite simple.
Gift Fund Requirements for all Loans
Before digging in to program-specific rules, here are some general guidelines for mortgage down payment gifts. The following items are required no matter which mortgage program you use.
No Strings Attached
First and foremost, a gift cannot have any strings attached. There can be no repayment from the borrower to the donor, expected or implied. Breaking this rule is mortgage fraud.
Mortgage Gift Letter
When borrowers accept and apply gift funds for a mortgage down payment, mortgage gift letter must be included in the loan file. It’s the affidavit signed by both the donor(s) and borrower(s) stating they have followed the rules. All mortgage programs require signed gift letters.
Relationship Between Borrower and Donor
No matter what, the relationship between the borrower and donor must be disclosed. Some loan programs require that down payment gifts only come from relatives of the borrower. Other mortgage programs are more generous and allow gift funds from employers, charitable organizations, churches and state and local governments.
Gift Fund Transfers and Tracking
All fund transfers for mortgage down payment gifts must have a paper trail. Money can’t magically come out of thin air at the closing. Underwriters will look at three months of bank statement for both the donor and borrower. If gift funds are deposited at least three months prior to the loan application, those monies are considered seasoned funds and are not subject to FHA or Fannie Mae guidelines.
Your lender will help you document the paper trail. You may be asked for copies of things like:
- Withdrawal slips
- Bank statements
- Certified check
- Cancelled check
Now let’s take a look at program-specific mortgage gift fund guidelines.
FHA Gift Funds
FHA loans only require a 3.5% down payment on the sales price of the home or appraised value, whichever is less. That’s a relatively lower hurdle to clear than some other major mortgage programs. In addition to the down payment, borrowers will also need cover some of the closing costs. But even after everything is added together, FHA loans are still extremely attractive.
In addition to less money down, FHA loans allow all of the down payment funds to come from gifts. This is one of the longtime features of FHA mortgages that has helped a lot of first time buyers over the years.
FHA Gift Guidelines
FHA guidelines are very clear about gift money rules.
- Gifts are applied to the down payment, however any portion not used to meet closing requirements may be counted as reserves.
- Gifts can only be used for purchase of primary or secondary homes, not investment properties.
- There’s low credit score boundary: If a borrower’s credit score is below 620 but higher than 580 at least 3.5% of the down payment needs to come from the borrower.
FHA has some of the least restrictive rules regarding who may be a donor. Funds can come from a(n):
- Employer or labor union
- Close friend with a clearly defined and documented interest in the borrower
- Church or charitable organization
- Governmental or public entity down payment assistance program providing home ownership assistance to low- and moderate-income families, or first time home buyers.
Mortgage gift funds cannot come from any person or entity with an interest in the transaction. Money from people who benefit from the sale of a property is considered an inducement to purchase. These people are prohibited from providing down payment gifts:
- Realtors or brokers
- Associated entities
Fannie Mae Gift Funds
Fannie Mae mortgages, also known as conventional loans, have slightly different rules than FHA.
Fannie Mae Gift Guidelines
- Gifts may be used for a principal residence or second home
- Gifts may be applied to part or all of down payment, closing costs, required reserves
- Gifts may not be applied to investment properties
- All down payment funds can be a gifted if the borrower’s down payment is 20% or more
- If the down payment is less than 20%, only part of the money can be from a gift while the rest will come out of the borrower’s pocket
For conventional loans, donors must also meet certain requirements. Down payment gifts for Conventional loans — unlike FHA – must come from donors who are related to the borrower. Here are the Fannie Mae requirements:
- Donor is a relative – borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or
- Donor is a fiancé, fiancée, or domestic partner
Unlike FHA, Fannie Mae excludes gift money that comes from unions, charitable organizations and down payment assistance programs run by state and local institutions.
Gift donors also cannot come from anyone who benefits from the sale of a property. They cannot have any affiliation with the:
- Real estate agent
- Any other interested party to the transaction
Additional Gift Letter Requirements for Conventional Loans
Fannie Mae requires two more additional items if gift funds come from a relative or domestic partner which are pooled with the borrower’s funds.
- Proof from the donor that he or she has lived with the borrower (shared residency, same address) for the past 12 months. Things like bills, bank statement or a driver’s license may be used.
- A statement that he or she will continue to live with the borrower in the new house.
Down Payment Gifts With VA and USDA Loans
VA and USDA mortgage programs programs are zero down (100 financing), so down payment gifts are much less common. It doesn’t mean you can’t apply gifts to a down payment; they are actually permitted. VA and USDA don’t have program-specific rules like FHA and Conventional loans. You’ll just follow the guidelines common to all loans (e.g. produce a signed gift letter and track the money).
Gift of Equity
A gift of equity (also known as an equity gift) is when a home is intentionally sold at a sales price less than market value to a family member. This gives the borrower instant equity in the property. So instead of cash from a donor, in this case it is equity that is donated from a seller. Make sense? Here are some rules:
- Equity gifts require a gift letter signed by the seller and borrower.
- The seller must be related to the borrower.
- The gift value may be subject to capital gains so it is wise to check with your accountant to determine the tax liability, if any.
- The settlement statement (also known as the HUD-1 Statement) must list the gift of equity.
FHA Gift of Equity Guidelines
Unlike regular FHA down payment gifts, FHA equity gifts can only happen between family members. Exceptions may be made by FHA when the transaction involves affordable housing programs. Request for exceptions are made by contacting a FHA Homeownership Center.
Gift Letter Template
All loan programs require the following information in the mortgage gift letter:
- Donor’s name, address, telephone number
- The dollar amount of gift
- Relationship of donor to the borrower
- Confirm that there is no expected repayment from the borrower to the donor
- Donor signature
- Borrower signature
Here’s a download-able sample gift letter template.
Down payment gifts and gifts of equity can help defray borrowers’ costs of purchasing a home. Some fundamental rules apply to all loans. Some rules just apply to specific mortgage programs. Careful documentation will ensure a smooth home buying experience!