A gift letter explicitly states that a friend or relative has given you money as a gift and not as a loan. Most lenders require a mortgage gift letter to use these funds for a down payment.
In general, lenders frown upon borrowers using a loan to fund their down payment on a home. Using a loan to take out a loan is extremely risky. Moreover, if you take out two loans, another lender may have a claim on your property, which may depict the borrower as a high-risk investment to another lender. Instead, “gifted” money allows the borrower to use the funds without the need to pay it back.
Money cannot mysteriously appear in your bank account. As a result, lenders want a clear paper trail of where your assets originate from. This aligns with why lenders also check your credit score and income to minimize the risk of defaulting on a loan.
Some lenders may provide you with a template for a gift letter. However, in general, most gift letters require the donor to specify the gift amount and his or her relationship to the borrower. The letter also states that there is no repayment expected or implied in this gift. This letter should give the donor’s contact information as well as include their signature.
Additionally, it may also be necessary to show evidence of the donor’s ability to provide these gift funds, such as copies of withdrawal or deposit slips.
Each type of loan may have different guidelines regarding who may give you a down payment gift.
Fannie Mae and Freddie Mac guaranteed conventional loans dictate that the gift must come from an acceptable donor, specifically a family member. For example, they define a family member as a spouse, a fiancé, a parent, a grandparent, a sibling, etc. For additional information, see the Fannie Mae Selling Guide published on April 3, 2019.
FHA loans have a broad range of acceptable donors. For example, the donor must be the borrower’s relative, employer or labor union, a close friend with an explicitly defined and documented interest in the borrower. They also allow charitable organizations and government agency problems for homeownership assistance. For more information, see the HUD Handbook 4155.1 Chapter 5 Section B.
In general, the main restriction for gift funds is that an interested party, such as the seller, builder, or developer are exempt.
Check with your mortgage lender for its gift funds guidelines. For example, other regulations may apply if you are applying for a loan to purchase a primary residence, a second home, or an investment property. Additionally, your lender may require that the borrower contribute a certain percentage of the down payment from your own financial funds.