- Mortgage lenders need documentation for large deposits in your bank account. For gifted funds, this means providing a gift letter.
- A donation letter should include the donor’s name and contact information and a statement that no refund is expected.
- Who is authorized to offer you funds for a down payment and how much they can give you depends on your type of loan and the classification of the property you are buying.
Saving enough for a down payment is often the biggest hurdle first-time homebuyers face. To overcome this, many turn to loved ones to help bridge the gap between what they need and what they have saved.
In 2019, 32% of first-time home buyers received a gift or loan from a relative or friend for their down payment, according to a 2020 report from the National Association of Realtors.
For most types of mortgages, you are allowed to use donation funds to make up your down payment. You might need some documentation to back it up.
What is a Gift Letter for a Mortgage?
A mortgage gift letter is a statement written by the person who gifted the funds to you confirming that the money is a gift and that no refund is expected. The gift letter should contain information about the giver and their relationship to the recipient.
When you apply for a mortgage, lenders go through your financial information to make sure you have the funds to make your down payment and the income to pay your monthly payments. As part of this process, you will typically provide your lender with two months of bank statements.
If he notices large and unusual deposits in your bank account, he will want to know where that money came from. Lenders do this to ensure that:
1. You are not using a loan for your down payment, which would change the circumstances of your mortgage approval and potentially make it more difficult for you to pay your monthly mortgage payments.
2. The money comes from an acceptable and non-fraudulent source.
“The donation letter acts as an affidavit that the funds are given and not loaned to the borrower,” explains Melissa Cohn, regional vice president of Mortgage William Raveis.
Do you need a gift letter for seasoned funds?
If lenders only ask for bank statements for the previous two months, does that mean all deposits made before that are in the clear? In general, yes. Once the money has been in your bank account for a while, it is considered “seasoned”.
“If the borrower can show two months of bank statements with no large deposits, then the money is seasoned and no gift letter is required,” Cohn said.
But keep in mind that even if you’re not asked for a gift letter, you should always be honest with your lender when answering questions about your finances. Lying on a mortgage application is mortgage fraud.
Down Payment Donation Rules
When it comes to the source and amount of funds you receive, the rules on what’s allowed differ depending on the type of mortgage you get.
None of the loan types listed here allow those with a financial interest in the transaction (like your real estate agent or the seller) to offer you funds for a down payment.
If you get a conventional mortgage backed by the government-sponsored companies Fannie Mae or Freddie Mac, you will only be able to receive donations from relatives. This includes:
- A spouse, fiancé or domestic partner
- A child or other dependent
- Someone to whom you are related by blood, marriage, adoption, or legal guardianship
If someone you are not related to, such as a close friend, is considering offering you money for a down payment, you will need to deposit these funds a few months before applying for a mortgage, to ensure that they are properly seasoned.
In some cases, there may be limits on how much of your deposit can come from another source. If you are buying a second home, for example, some of your down payment may have to come from your own funds.
Your entire down payment can be gift funded if you purchase any of the following:
- A main residence of a dwelling
- A principal residence of two to four units if you are paying a down payment of 20% or more
- A second home if you are putting down 20% or more
If you are buying a two- to four-unit primary residence or second home with less than 20% down payment, you will need to contribute at least 5% of the property’s value from your own funds. Donation funds cannot be used to purchase investment property.
Government guaranteed mortgages
If you get a mortgage guaranteed by a government agency, the rules are slightly different.
For FHA mortgages, which are backed by the Federal Housing Administration, the list of people who can contribute to your down payment is a bit longer than it is with conventional loans.
Acceptable down payment donors on FHA mortgages include:
- Your employer or union
- A close friend with a “clearly defined and documented interest in the borrower”
- Charitable organizations
- Government agencies or public entities that provide assistance to low to middle income families and first time home buyers.
USDA mortgages and VA mortgages are even more forgiving. As with the other loan types listed here, you cannot receive gift funds for your VA or USDA down payment from parties with a financial interest in the transaction. Other than that, there are no rules limiting where your donation comes from.
With all these government guaranteed mortgages, there is no minimum contribution requirement from the borrower; your entire down payment can come from donation funds.
How to Write a Mortgage Gift Letter
The main piece of information your lender is looking for in a donation letter is a statement from the donor that the funds are a gift and you are not expected to repay them. They want to be certain that the funds you receive are not a loan, as a loan generally cannot be used for a down payment.
Your lender can provide you with a template of what they want the letter to include. This will likely include:
- The name and contact details of the donor
- Their relationship with you
- The date the gift was or will be given
- Statement that the funds are a gift, no refunds are expected, and none of the funds were donated by anyone with an interest in the transaction.
- Address of the property purchased
- Information about the account from which the gift comes
- Donor and recipient signatures
Gift letters and tax consequences
As a beneficiary, you generally don’t have to worry about tax consequences when you receive funds as a gift for a deposit. But you might want to make sure your donor knows that if they give you a big enough sum, they’ll have to report it to the IRS.
For 2021, the annual exclusion for gifts was $15,000. In 2022, it’s $16,000. If your donor gives you less than that, they probably don’t need to disclose their donation. If they give you more, anything they give you beyond the annual exclusion will need to be disclosed to the IRS. But even if it crosses that threshold, they probably won’t have to pay taxes on it; the amount will simply be deducted from their lifetime tax exemption.