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When homebuyers receive gift money for a down payment, mortgage lenders typically require a gift letter to document where the funds came from and to confirm they are not a loan. Here’s how these gift letters work, plus essential down payment gift rules you should know to ensure a smooth mortgage transaction.
A mortgage gift letter is a formal document that helps satisfy the lender’s requirement that a borrower’s down payment funds come from legitimate, verifiable sources. The letter involves the donor verifying, in writing, that they have gifted the money to the borrower without any expectation of repayment. It also states that the funds are intended solely for the purchase of a primary residence or second home, and cannot be used for an investment property.
The gift letter typically includes important details such as the dollar amount of the gift, the donor’s name, address, telephone number, and relationship to the borrower (such as family members or a domestic partner). It also confirms that the donor is not an interested party to the transaction, which means they have no financial stake in the sale or purchase of the property.
Lenders often require accompanying bank statements or other documentation to verify the transfer of gift funds from the donor’s account to the borrower’s account or to the closing agent. This verification helps prevent fraud and ensures compliance with mortgage underwriting guidelines, such as those from Fannie Mae, Freddie Mac, USDA and VA loans.
Understanding the tax implications is also important: while gift money is not considered taxable income for the recipient, the donor may need to file a gift tax return if the gift exceeds the IRS annual exclusion limit. Consulting a tax professional can help both the donor and recipient navigate any potential tax responsibilities.
In summary, a properly completed gift letter and supporting documents provide the lender with the assurance that the down payment funds are genuine gifts, allowing borrowers to use gift money confidently toward closing costs, down payment, and other expenses related to buying a home.
Including these details helps satisfy lender requirements and verifies that the gifted funds are legitimate and acceptable for the down payment. Lenders may also require supporting documentation like bank statements to verify the transfer of funds.
When a mortgage lender underwrites a loan application, they carefully verify the borrower’s finances, including the source of the down payment funds. If a borrower uses gift funds for their down payment, a mortgage gift letter serves as a critical document that establishes and explains the origin of those funds. It confirms that the money is a no-strings-attached gift, not a loan or additional debt the borrower must repay.
Lenders require this verification because they calculate your debt-to-income (DTI) ratio, which measures how much of your income is allocated to repaying debts. A high DTI ratio can make you a risky borrower. By providing a gift letter, you ensure that the gifted money isn’t counted as debt, helping to keep your DTI ratio lower and improving your loan eligibility.
Additionally, gifted money is not considered taxable income, so it does not increase your tax burden. This means more of your own money is available to pay your mortgage and other expenses, making your financial profile more attractive to lenders.
Mortgage lenders also need to confirm that the gift funds are from an acceptable donor who is not an interested party in the transaction—meaning the donor cannot be the seller, builder, real estate agent, or any other party with a financial stake in the property sale. This protects the lender’s security and ensures compliance with underwriting guidelines for various loan types, including conventional loans, USDA and VA loans.
Supporting documentation such as bank statements and transfer records must accompany the gift letter to verify the movement of funds from the donor’s account to the borrower’s account or the closing agent. This transparent process helps prevent fraud and provides the lender with the confidence that the gift funds are legitimate assets being used for the down payment.
Most loan programs allow gift money from family members, and some lenders also permit gifts from non-relatives under specific conditions. Acceptable donors typically include relatives by blood, marriage, adoption, or legal guardianship, as well as domestic partners, fiancés, or individuals with a close familial relationship to the borrower.
For conventional loans, Fannie Mae and Freddie Mac guidelines specify that gift funds must come from an acceptable donor who is not an interested party to the transaction. This means the donor cannot be the seller, builder, real estate agent, or any other party involved in the sale of the property. Similarly, USDA and VA loans have strict rules prohibiting gift funds from any party with an interest in the property sale to maintain the integrity of the transaction.
In some cases, gifts can also come from a trust established by an acceptable donor or from an estate, but these require additional documentation and a properly executed gift letter that includes details about the trust or estate.
It’s important to note that gift funds cannot be used for investment properties; they are only allowed for the purchase of a primary residence or a second home. Additionally, some loan types require a minimum borrower contribution from their own funds before gift money can be applied toward the down payment, closing costs, or financial reserves.
By understanding who can provide gift money and the documentation required, borrowers can better prepare their mortgage application and ensure a smooth underwriting process. Always check with your lender for specific requirements related to the loan type and property type you are financing.
If a relative, family member, or friend plans to provide you with gift funds for your down payment, you’ll need to submit a properly completed gift letter along with bank statements or other relevant documentation showing the transfer of gift money from the donor's account to yours. This documentation verifies the legitimacy of the funds and satisfies lender requirements.
It is generally best to receive the gift money at least two months before applying for a mortgage to allow the funds to be properly "seasoned." In mortgage terms, seasoning refers to the length of time the borrower’s funds must be held in their account before they can be used for the down payment or closing costs. Properly seasoned funds help reassure lenders that the gift money is not borrowed or otherwise encumbered.
However, gifted funds received within 60 days of your mortgage application can still be used, although your lender may require additional documentation to verify the source and transfer of the funds.
When you find a home and your lender clears you to close, you will make your down payment—including any gift money—at the closing. This payment is part of your total cash to close. Typically, the down payment and closing costs are paid via certified check, cashier’s check, or wire transfer to the closing agent.
By understanding the specific gift letter requirements and loan type rules, borrowers can better prepare their mortgage application, save time during underwriting, and ensure a smooth path to homeownership.
The rules regarding the use of gift funds for a down payment vary depending on the type of property you are purchasing. Understanding these rules can help ensure compliance with lender requirements and smooth processing of your mortgage application.
If providing a direct gift for a down payment is not feasible or preferred, there are alternative ways to assist your child or family member in purchasing a home. These options may have different implications and should be considered carefully, ideally with professional advice.
By exploring these alternatives, you can support your family member’s path to homeownership while navigating the complexities of mortgage financing and gift money rules.
There isn’t a limit imposed by mortgage lenders or specific loan programs, but in rare cases there might be tax implications for the giver. For 2025, an individual can gift up to $19,000 without any tax consequences. That’s just the annual exemption, however. There’s also an exemption that applies to gifts over a lifetime. For this reason, most givers won’t be subject to the gift tax, even if reporting a large gift.
Recipients of gift money for a mortgage do not have to report the money received as a gift to the IRS, nor pay taxes on its value.
Yes. Most loan programs allow gift money for alternative purposes like covering closing costs or buying mortgage points. It’s important to review the rules for the loan type you’re considering, though, so you don’t lose eligibility.
In today’s market, where high rents, expensive homes, and student loan debt create significant financial hurdles, saving for a down payment can be especially challenging for young buyers. If you’re able to assist your child or another relative with a down payment gift, you’re helping them take a crucial step toward building equity and long-term wealth through homeownership.
However, before providing gift funds, consider why your loved one needs assistance with buying a home. Financial literacy and responsibility play key roles in their success as homeowners, so your support should ideally be part of a broader plan to ensure they manage their mortgage and finances effectively.
It’s also important to be aware of potential gift tax implications associated with large gifts. For 2025, the IRS allows an annual exclusion of up to $19,000 per individual for gift money without triggering gift tax reporting requirements. If the gift amount exceeds this threshold, the donor may need to file a gift tax return, although the recipient of the gift is not responsible for paying taxes on the funds received. To fully understand the tax consequences and ensure compliance, consulting a tax professional is highly recommended.
When preparing a gift letter for mortgage purposes, including a clear statement that the funds are a gift with no expectation of repayment is essential. This mortgage gift letter should also specify the dollar amount, the donor’s relationship to the borrower, and confirm that the donor is not an interested party in the real estate transaction, such as the seller, builder, or real estate agent. Proper documentation, including bank statements and transfer records, helps verify the legitimacy of the gift money and supports a smooth mortgage approval process.
By thoughtfully providing gift funds and following lender guidelines, you can empower your family member to achieve homeownership while avoiding potential pitfalls related to gift tax returns and mortgage underwriting requirements.
When your client goes to the grocery store, they can't tell the grocer, “I like the price $2.50/pound price of the ground chuck, but want to come back in a month and buy it for the same price.” Nor can you do that at the dry cleaner's, or the hardware store, or your dentist for teeth cleaning. But you, representing your client, can do it at Orion: if you like our current mortgage rates, and we offer some very competitive rates, you can lock them in for 30 days or longer.
With interest rates increasing in the early part of the year before reversing course in May and June, heading lower, it has brought up the age-old question for you and your borrowers: “Lock or float?” It's a question where our brokers can add value, and provide guidance to clients. It is a very important question for borrowers since it will determine the mortgage rate they ultimately receive.
Here's some advice on how experienced brokers answer it, or at least have an educated discussion with your client. Locking an interest rate means it will not change as long as the loan funds before its expiration, whereas “floating” a rate means it may go up or down until it is finally locked in.
It is important to consider scheduling. How long will the appraisal take? What about underwriting? If your client is buying a home, when can the seller move out? When does the client's lease expire? When can the movers come?
You, as the trusted advisor to your client, can help advise them on which move to make. Nobody has a crystal ball when it comes to predicting the market, so it really comes down to if they are happy with the current rate. And rates can move every day, up or down, and Orion's job is to obtain the best rate for you and your client possible at the time of rate lock, whether that is 60 days before closing, or 6. Learn more about what happens after your client’s loan closes with Orion.
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