Securing a mortgage can be complex, mainly when gathering the necessary funds for a down payment. One potential source of these funds is a gift from family or friends. However, lenders require specific documentation to ensure that the funds are a gift, not a loan when using gifted money for a down payment. This is where a gift letter comes into play.
What Is a Gift Letter?
A gift letter is a written statement provided to a mortgage lender that declares that a sum of money given to a homebuyer is a gift, not a loan. This letter is crucial in the mortgage approval process, as it helps the lender verify that the homebuyer will not have to repay the money, which could impact their ability to make mortgage payments.
Critical Components of a Gift Letter
A gift letter must include specific details to satisfy lender requirements:
- Donor’s Information: The full name, address, and relationship to the homebuyer of the person giving the gift.
- Recipient’s Information: The full name of the homebuyer receiving the gift.
- Gift Amount: The exact amount of money being gifted.
- Statement of Gift: An explicit declaration that the money is a gift and does not need to be repaid.
- Donor’s Source of Funds: Information about where the donor’s money comes from, ensuring that the funds are legitimate and readily available.
- Signatures: Both the donor and the recipient must sign the gift letter.
- Date: The Date when the gift letter is written and signed.
Sample Gift Letter
Here’s a basic template of what a gift letter might look like:
[Donor’s Name]
[Donor’s Address]
[City, State, ZIP Code]
[Date]
[Recipient’s Name]
[Recipient’s Address]
[City, State, ZIP Code]
To Whom It May Concern,
I, [Donor’s Name], at this moment, declare that I am giving a gift of $[Exact Amount] to [Recipient’s Name], my [relationship to recipient], to be used towards the purchase of a home at [property address].
This gift is given freely and does not require repayment. The funds are coming from my [bank account or other source], and I have provided the necessary documentation to verify this.
Sincerely,
[Donor’s Signature]
[Recipient’s Signature]
[Donor’s Printed Name]
[Recipient’s Printed Name]
How to Use a Gift Letter in the Mortgage Process
- Inform Your Lender: Let your mortgage lender know that part of your down payment will come from a gift. They will provide specific requirements for the gift letter.
- Prepare Documentation: In addition to the gift letter, your lender may require additional documentation, such as bank statements from the donor, to verify the source of the funds.
- Submit the Gift Letter: Once the gift letter is prepared and signed, submit it along with the required documentation to your lender.
- Verification Process: The lender will review the gift letter and the accompanying documentation to ensure everything is in order. They may contact the donor to verify the information.
Why Lenders Require a Gift Letter
Lenders need assurance that the funds used for the down payment are not loans the homebuyer will need to repay. If the funds were a loan, it could impact the homebuyer’s debt-to-income ratio, making it riskier for the lender. The gift letter provides clarity and helps maintain the integrity of the mortgage process.
Conclusion
A gift letter is vital in the mortgage process when using gifted funds for a down payment. It ensures transparency and helps the lender verify that the gift is genuine and will not need repaid. By understanding the components and importance of a gift letter, homebuyers can smoothly navigate the mortgage approval process and secure their dream home with the help of loved ones.
