If you’re fortunate enough to have a family member or close friend who is giving you funds to put towards a down payment, congratulations. But in this scenario, a gift letter can be an important part of validating money given to you for the down payment or closing costs on a home.
Approximately 22% of first-time homebuyers received gift funds to help with the purchase of a home, according to a 2022 National Association of Realtors® (NAR) survey.
Properly documented gift funds will help the mortgage loan to pass underwriting so your loan may be approved. In this guide, you’ll learn the story on gift letters, how they differ for various types of mortgages, plus other important details.
What Is a Gift Letter?
A mortgage gift letter is a legal document whose primary purpose is to state that down payment funds given to the borrower are not expected to be repaid. The lender wants to ensure that the borrower is not taking on more debt to help finance the mortgage, even if it is money from family or friends. The letter is required to pass underwriting.
It’s essential that a gift letter include all the necessary elements to be considered in your loan application.
💡 Quick Tip: You deserve a more zen mortgage loan. When you buy a home, SoFi offers a guarantee that your loan will close on time. Backed by a $5,000 credit.‡
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
What Should Be Included in Gift Letters?
Lenders usually provide a standard gift letter for you and the donor to complete, but it’s helpful to know what needs to be stated. Gift letters should include the following details:
• Dollar amount of the gift
• Name of the donor, address, phone number, and details of the account from which the money will be or was drawn
• Relationship to the borrower
• Name of the borrower, address, and phone number
• Address of the home associated with the down payment
• The donor’s signed statement saying the funds will not need to be repaid by the borrower
• Language saying the funds were not made available to the donor by any party interested in the sale of the property
• The dated signatures of borrower and donor.
Note: Along with a gift letter, the lender may want to see proof of funds in the donor’s account and evidence the money was deposited into the borrower’s account.
Does Timing and Amount of a Gift Matter?
When it comes to gift letters, when and how much you received may need to be documented.
Amount
There typically is no limit on the amount of gift money, but when a deposit is more than half of your monthly household income, lenders usually will want an explanation.
For USDA loans and FHA loans, you’ll need to explain any amount over 1% of the purchase price or appraised value of your home that was deposited in your account recently. There are exceptions, including tax refunds and bonuses, that do not need to be “seasoned” or explained.
Timing
A lender will look at bank statements for the past 60 to 90 days. Amounts that existed in your account before this time are considered seasoned, and you may not need to provide a gift letter for that money. The amount of a deposit inside that time frame may need a letter of explanation.
If you have money in other places, you’ll want to deposit it into your bank account for proper seasoning.
Who Can Give Down Payment Gifts?
Down payment gift regulations vary by loan type, but generally, gift funds are allowable on many mortgage types from close family members or friends. There are some key differences between regulation for down payment gifts for conventional and government home loans (USDA, VA, and FHA mortgages).
FHA Loans
Under Federal Housing Administration guidelines, gift funds for the down payment are allowable from the following donors:
• Relatives of the borrower
• The borrower’s employer or labor union
• A close friend with a clearly defined and documented interest in the borrower
• A charitable organization
• A government agency or public entity that provides homeownership assistance to low- and moderate-income families or first-time homebuyers.
The gift must not come from an entity that has an interest in the sale of the property, such as the seller, the builder, the real estate agent, or the broker.
Buying a fixer-upper? This guide to FHA 203(k) loans and options could be a good read.
Conventional Loans
Under conventional loan guidelines (meaning non-government), gift funds are allowable from these sources:
• A relative, which Fannie Mae defines as someone related by blood, marriage, adoption, or legal guardianship
• A domestic partner or fiance.
The donor may not be anyone with an interest in the transaction, such as the builder, developer, or real estate agent.
USDA or VA Loans
With loans backed by the Department of Agriculture or Veterans Affairs, the only people who cannot provide gift funds are those who would benefit from the sale, such as the seller, lender, real estate agent, or developer. The gift funds must be properly sourced, which means the lender wants to see a paper trail from the bank account of the donor to that of the borrower.
💡 Quick Tip: Don’t have a lot of cash on hand for a down payment? The minimum down payment for an FHA mortgage loan is as low as 3.5%.1
Are There Limits on Gifts?
No, but some loans may require borrowers to come up with a portion of the down payment. This is what’s known as a minimum borrower contribution, and it applies to conventional loan financing. It is different based on what type of real estate is being purchased, be it a primary residence, second home, or investment property.
Primary Residences
For primary residences, there is no minimum borrower contribution. All of the money needed to complete the transaction can be a gift. This is true whether the loan-to-value ratio is above or below 80% for conventional financing.
Second Homes
For second homes, if the loan-to-value is above 80% (meaning the down payment was less than 20%), borrowers must make a minimum contribution of 5% from their own funds. This is also true on principal units with two to four units.
Investment Properties
Gift funds are not allowed on conventional mortgages for investment properties. Fannie Mae also states that gift funds are not to be used for investment properties.
Recommended: How to Buy a House From a Family Member
How Does This Affect Taxes?
Taxes may affect the donor of the funds, unless the home purchaser makes special arrangements to pay taxes on the gift funds.
The money gifted may be excluded from tax as per the annual exclusion amount. The IRS says the annual exclusion for gifts is $17,000 for 2023. This is per person, so if buying real estate with a partner, the amount doubles to $34,000.
If the gift is from a set of parents, each parent can gift that amount to each of the borrowing partners. This allows for $68,000 to be gifted before triggering the gift tax. In other words:
• Parent 1: $17,000 for borrowing partner 1, $17,000 for borrowing partner 2 = $34,000
• Parent 2: $17,000 for borrowing partner 1, $17,000 for borrowing partner 2 = $34,000
Adding the amount for both parents contributing for both borrowers equals $68,000.
If that amount is exceeded, each donor can also claim it as part of the lifetime exclusion on estate taxes, which has a limit of $13.61 million for 2024.
Gift Equity Letters vs Gift Letters for Mortgages
A gift of equity is when the seller gives a portion of the home’s equity to the buyer. It is transferred to the buyer as a credit in the transaction and may be used to fund all or part of the down payment on principal or second homes.
If there is a gift of equity, a gift of equity letter is required. A signed gift letter and settlement statement with the equity gift will be retained in the loan file.
While there are similarities, there are also some differences.
| Gift of Equity | Gifts for Mortgages |
|---|---|
| Must be applied as a reduction in purchase price or credit | Gifts can be an unlimited amount but are not accepted for investment properties |
| Borrower may not receive cash back at closing for gift equity | Borrower can receive funds back at closing |
| Required to notify appraiser of equity gift | Appraiser doesn’t need to know about it |
| Is from the seller, who can be a relative. For FHA loans, only equity gifts from family are acceptable | Is from a donor related to the borrower |
| Can be used to fund the down payment and closing costs | Can be used to fund the down payment and closing costs |
| Permitted for principal and second homes | Permitted for principal and second homes |
Whether you’re fortunate enough to receive a gift or you’re making your own way toward homeownership, this mortgage calculator may come in handy.
Recommended: Mortgage Loan Help Center
The Takeaway
A gift letter ensures that the money, or equity, you receive when buying a home is validated when your mortgage loan goes through underwriting. It’s a necessary step on your way to loan approval that a good mortgage lender may be able to help you with.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
Photo credit: iStock/Pictac
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
‡SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.
¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
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