Mortgage Down Payment Gift Letter Template & Requirements
Many mortgage loan programs available today allow borrowers to use gift money from an approved donor, such as a family member of close friend. But they also require the borrower to obtain a "gift letter" from the person(s) providing the funds.
This article provides a basic template for a mortgage down payment gift letter, along with some sample verbiage you can use. It also explains the standard rules and requirements for these letters, according to the different loan program guidelines.
Getting Financial Help from a Third Party
For many home buyers, the down payment represents the biggest financial hurdle they most overcome when buying a house. Depending on the type of mortgage loan you are using, the minimum required down payment might range from 3% to 20% of the purchase price. That's a significant sum.
The good news is that borrowers don't necessarily have to pay the whole thing out of their own pockets. In many cases, home buyers can use gift money to cover the down payment and/or closing costs associated with a mortgage loan.
Did you know: Conventional, FHA and VA mortgage loans allow borrowers to use gift money from a third party to cover some -- or even all -- of their down payment expense. The rules and requirements vary, depending on what type of loan you are using. The one thing they have in common is that all of the mortgage programs require the borrower to obtain a gift letter. (See the sample template below.)
Requirements for Mortgage Down Payment Gift Letters
Mortgage down payment gift letters don't have to be complex or lengthy. They just have to hit a few key points. While the specific requirements can vary depending on loan program, there are some common "ingredients." required across the board.
First of all, the gift letter should be written by the family member (or other approved donor) who is providing the funds. It should not be written by the borrower / home buyer. That's an important point. The primary purpose of the letter is for the donor to tell the lender that they are giving the money freely and do not expect any kind of repayment. So it should be written and signed by the person who is gifting funds to the borrower.
At a minimum, a down payment gift letter should include:
- The donor's name, address, phone number, and their relationship to you.
- The amount of money they are giving you (exact dollar amount).
- The date of the gift / donation.
- A statement verifying that they do not expect repayment.
- Address of the home being purchased (in some cases).
- The donor's signature.
Item #4 above is the most important item on the list. The mortgage lender needs to ensure that the gifted funds are truly a gift, and that they're not going to add to your existing debt load. If the money was actually an interpersonal loan from a family member (with a repayment requirement), it would affect your debt-to-income ratio. But if it's a gift that you don't have to repay, it won't add to your overall debt. That's the primary purpose of the letter.
Here's what the lender is concerned about:
They qualify you for a mortgage loan based on your current debt and income picture. They do this to make sure you can afford your monthly payments, based on the amount of money you earn and the amount you pay toward your monthly debts.
If a family member loans you several thousand dollars for your down payment and expects to be repaid, it could interfere with your ability to make your mortgage payments.
Ask in advance: If you're planning to use down payment gift money when buying a home, ask your mortgage lender about the specific requirements and guidelines in advance. You need to know three things at a minimum: (1) who is allowed to donate money, (2) how much they can give, and (3) what else the donor might have to provide in addition to the gift letter. Do they need to provide a bank statement as well? A copy of the canceled check? Find out.
A Sample / Template Letter
The mortgage down payment gift letter itself is pretty straightforward. Ask your mortgage lender if they have a preferred format, or if they require any items beyond those listed above. Otherwise, you could just use a standard template for your letter. Here's a sample you can start with:
February 5, 2019
To whom it may concern,
I am giving my brother, John Doe, a gift of $7,000 toward the purchase of his home. I do not expect or require any kind of repayment for this gift. I wrote the check for these funds on February 1, 2019, and he deposited it the next day. Should you need to contact me regarding this contribution, you can do so using the information below:
1234 Elm Street
Anytown, VA 24018
As you can see, it doesn't have to be anything fancy. This short sample gift letter covers all of the key requirements listed above. It includes the donor's name, his contact information, and his relationship to the home buyer. It mentions the amount being gifted ($7,000). It explains that there is no repayment requirement for the gift amount -- the critical item. It's simple and straightforward.
The lender will likely verify that the gifted funds are in your account, early on in the process. They want to make sure you can access the money for mortgage down-payment purposes. A bank statement will generally suffice for this purpose. The lender may also ask for a deposit slip, or a copy of the canceled check (the check written by the family member for the down-payment gift to you).
The best-case scenario is to have the gifted funds in your own account long before the scheduled closing date. If you don't have the funds in time for closing, the donor might be able to give the escrow / closing agent a certified check for the gift amount, at the time of closing. But it's a lot easier to deposit the check well in advance. If you have any questions about this, be sure to ask your lender.