If you're buying a home and are fortunate enough to have someone give you a financial gift to help with the down payment or closing costs, you'll need to provide a mortgage gift letter to the lender. A gift letter confirms that the money you received is a gift and not a loan that you'll have to repay. Here's what you need to know about mortgage gift letters:
What is a Mortgage Gift Letter?
A mortgage gift letter is a document signed by the gift giver that confirms that they have given the homebuyer a certain amount of money as a gift, with no expectation of repayment. The gift letter is typically required by the lender as part of the mortgage application process to ensure that the funds used for the down payment or closing costs are not a loan.
Who Can Give a Gift for a Mortgage?
Gifts for a mortgage can come from a variety of sources, including family members, friends, employers, or charitable organizations. However, lenders typically require that the gift comes from a family member or an approved source, such as a charitable organization or employer, to ensure that the funds are not a loan in disguise.
What Information Should Be Included in a Mortgage Gift Letter?
The mortgage gift letter should include the following information:
- The name, address, and contact information of the gift giver
- The relationship of the gift giver to the homebuyer
- The amount of the gift
- A statement that the funds are a gift and not a loan
- The property address
- The date the gift was given
- The signature of the gift giver
Why is a Mortgage Gift Letter Important?
A mortgage gift letter is important because it confirms that the funds used for the down payment or closing costs are a gift and not a loan. Lenders want to ensure that borrowers have the ability to repay the mortgage, and loans used for the down payment or closing costs could affect the borrower's debt-to-income ratio and ability to repay the mortgage. The gift letter helps lenders verify the source of the funds and ensures that the borrower is not taking on additional debt to cover the down payment or closing costs.
Do You Need a Gift Letter for Every Gift?
Yes, you'll need a separate gift letter for each gift received for the down payment or closing costs. Each gift letter should include the information listed above and be signed by the gift giver.
What if You Can't Get a Mortgage Gift Letter?
If you're unable to get a mortgage gift letter from the gift giver, you may not be able to use the funds for the down payment or closing costs. In some cases, the lender may accept a signed letter from the borrower stating that the funds are a gift, along with supporting documentation, such as a bank statement showing the transfer of funds.
The Bottom Line
A mortgage gift letter is a crucial document that helps lenders verify the source of the funds used for the down payment or closing costs. If you're receiving a financial gift from someone to help with the purchase of your home, make sure you obtain a gift letter that includes all of the required information and is signed by the gift giver.
Advantages of a Mortgage Gift Letter
The use of a mortgage gift letter has several advantages for both the giver and the receiver. Here are some of the benefits:
For the Giver:
1. Helping a loved one: Providing a mortgage gift is an excellent way to help someone you care about buy a home. It allows you to contribute to their success and help them achieve their dream of homeownership.
2. Reduced tax liability: Under IRS rules, you can give up to $15,000 per year to any individual without incurring gift tax. If you are married, you and your spouse can each give $15,000, effectively doubling the amount of the gift. If you gift more than the annual limit, you may need to file a gift tax return and pay taxes on the excess amount. However, there is a lifetime gift and estate tax exemption of $11.7 million per person (as of 2021), which means most people won't be subject to gift or estate taxes.
For the Receiver:
1. Qualifying for a mortgage: For many people, the biggest hurdle to buying a home is coming up with the down payment. A mortgage gift letter can make it easier for the borrower to qualify for a mortgage and obtain a lower interest rate.
2. Lower costs: In addition to the down payment, buying a home comes with other costs, such as closing costs and fees. By receiving a mortgage gift, the borrower can save money and reduce their financial burden.
Disadvantages of a Mortgage Gift Letter
While a mortgage gift letter can be advantageous for both parties, there are also some potential downsides to consider:
For the Giver:
1. No guarantee of repayment: Once you give the money, you have no legal claim to it, and there is no guarantee that the borrower will repay you. While most people will want to repay a gift, there is always a risk that they won't be able to.
2. Reduced financial flexibility: Giving a large gift can reduce your own financial flexibility and limit your ability to meet your own needs in the future.
For the Receiver:
1. Stringent requirements: Mortgage lenders often require specific documentation for gift funds, such as a gift letter, proof of transfer of funds, and documentation of the giver's financial ability to make the gift. Failing to meet these requirements can cause delays in the mortgage approval process.
2. Relationship strain: Money can be a sensitive topic, and accepting a gift from a friend or family member can sometimes lead to tension or strain in the relationship.
Conclusion
If you are considering using a mortgage gift letter to help a loved one buy a home, it's essential to understand the advantages and disadvantages of this approach. While it can be a useful tool, it's important to weigh the potential risks and benefits carefully. If you are a borrower who is receiving a gift, make sure to work closely with your lender and follow their guidelines to ensure a smooth and successful mortgage process.
Ultimately, a mortgage gift letter can be a great way to help someone achieve their dream of homeownership, but it's not the right choice for everyone. Be sure to consult with a trusted financial advisor or real estate professional to determine if it's the best option for your situation.
